The narrative on Wednesday was that the market was celebrating the results of an election that split Congress and produced political gridlock for the next two years.
It was the handy explanation for the powerful move on Wednesday, but there are a few problems with it. First, the election results were not a big surprise. The expectations for quite a while were that the Democrats would take the House and the Republicans might increase their seats in the Senate. The market knew this was coming and should have discounted it to a great degree, but from the price action that did not appear to happen.
Also, the assertion that gridlock is welcomed amid the current business-friendly political environment is a questionable one. The theory is that the market and businesses in general prefer a political environment in which neither party can advance any new policy. There is a preference for the status quo, but that makes no sense when Congress and the president have been as friendly to business as they have been over the last two years.
We now can expect gridlock to lead to intensifying political battles with President Trump. The Democrats will be able to use their control of the House to advance a number of investigations. There was some talk about work on bipartisan bills in the areas of health care, drug pricing and infrastructure, but it remains to be seen whether that is possible.
While gridlock was a convenient explanation for the market's strength on Wednesday, the more likely explanation was positioning, price action, computer algorithms and aggressive trading. The action had more to do with active market players creating some strong action that caught many other market players by surprise. There was no real fundamental basis for it, but that is what happens in a market that is dominated by machines.
The narrative that gridlock is a major market positive is going to quickly fade as the market starts to focus on the same issues that caused difficulty recently. First up are interest rates. The Federal Open Market Committee (FOMC) will release its interest rate decision and policy report at 2 p.m. here on Thursday.
It is widely anticipated that there will be no rate hike, but the market anticipates one next month and will be looking for clues in the policy statement about how many more hikes will occur thereafter. President Trump has made it clear that he doesn't agree with the Fed's hawkish tilt, but that seem unlikely to have any impact on the decisions of Chairman Jerome Powell and the rest of the Fed.
A more interesting issue will be whether the very poor market action in October and weak action in markets around the world may cause the Fed to slow rate hikes. After the very strong October jobs there probably will be no tendency to do so.
The market used to love to love the Fed no matter what it did, but that no longer is the case. Rising interest rates, higher inflation and a hawkish Fed are now headwinds that have caused periodic upset. Bonds are struggling near multiyear lows and will be in focus on Thursday.
The momentum Wednesday crushed anyone who was fighting it and will create some underlying support now, but a hawkish Fed may give market players some pause. The technical conditions improved Wednesday, but building on them will be a challenge.