As much as I'd like to avoid discussing elections, it is unavoidable here on this midterm Election Day.
Republicans taking either the House or the Senate (or both) is the consensus view and is perceived as bullish for risk. The thinking is that gridlock will slow spending, thus reducing inflation, reducing pressure on the Fed and helping rates, which will let equities rip higher. Seems believable and plausible.
The potential exists for many contests not to be decided by Wednesday as voting takes time and mail-in votes need to be tallied (or potentially waited on, if it is a close election where the day a ballot is postmarked is the metric for its validity). The possibility seems largely built in, but things could get contentious. It probably is not an overnight event but is something to watch if the issue develops and seems to be big enough to sway the outcome in the House or Senate or both.
As for a possible big blue wave, I haven't seen much mention of this and it seems unlikely based on polls and the path midterm elections typically follow, but markets would not react well.
I'd buy any dip on a small win for Democrats as I think that regardless of the election:
--The president will want to switch to finding peace between Ukraine and Russia. Not only is the war expensive in terms of supplying weapons, but as sanctions ramp up later this year and early next year, the West will be collectively hurting itself. There is already concern in Europe about ratcheting up the sanctions, and rightfully so, as it will probably just drive energy shipments to countries that will buy from Russia, causing it to take longer to buy more expensive shipments in the West from elsewhere. Not to mention, the war seems unwinnable, which may be why the tone in Russia is hinting at the potential of softening, and China seems tired of this war.
--Inflation will be less of a bogeyman after the election as politicians will focus their attention on jobs. That shift makes sense and can be latched on by those in the Fed Who Don't See Dead People. There seems to be a segment of the Fed that is increasingly interested in seeing how the lag effects of the already done hikes and ongoing quantitative tightening affect the economy. Also, finally, there seem to be those who are questioning making policy based on clearly old (and therefore not useful) data. (BTW, some serious, model-driven economists also question the size of the birth/death of jobs in the latest jobs report, which gives me some hope.)
I like the election rally and aside from a blue wave would be buying dips.
Other Things to Watch
Foreign exchange markets seem to be holding their own even as China has downplayed the allegations that it is shifting its Covid policies. Part of last Friday's rally was fueled by several stories that China was considering changing how it combats Covid. China for all intents and purposes denied those reports over the weekend, but stocks held their own and the all-important Japanese yen is holding on to its gains as I type this on Tuesday morning.
Yes, we get a Consumer Price Index (CPI) report this week, but I fully expect core, if driven by rent, will be ignored much more than last month as so many people are coming around to our way of thinking.
Finally, yet another run on a crypto "exchange" (I use that term very loosely) is sparking a big selloff in FTT (a "native token of the FTX Trading Platform ecosystem" - a Bloomberg description). It is down more than 20% as of Tuesday morning and seems to be dragging major cryptocurrencies down as well (Bitcoin down 5% and Ethereum down 6%).
I had hoped that China cracking down on its citizens and businesses would support Bitcoin for longer, but that trade may well be over. These types of selloffs are indicative, to me, of problems with the "plumbing" in crypto, which has a tendency to expose more flaws in the system rather than quietly resolving themselves. It is a great time to remember that terms such as "banks," "exchanges" and "custodian" all have real-world meanings, and in traditional finance those are more than labels -- they are given to entities to that meet certain regulated criteria. That is just not the case for much of the crypto world. We apply terms to entities rather loosely and people all too often attribute some of the usual meaning of those labels to those firms without really verifying that they are applicable.
In the meantime, we get to watch all markets, but especially U.S. stocks, oscillate wildly as daily expiration options become a more commonly used trading vehicle.
For those watching, ProShares UltraPro QQQ (TQQQ) has taken in more than $1 billion in the past two days with a big surge in shares outstanding, which at least supports the view that some gridlock scenario is the consensus and might be getting priced in already.
