The significant rally in the dollar index occurred as inflationary pressures caused the U.S. central bank to raise interest rates.
The Market’s Initial Reaction to the Mid-Term Elections
The kneejerk reaction to the mid-term elections was selling as the four leading indices, including the S&P 500, DJIA, NASDAQ, and Russell 2000, fell on Wednesday, November 9.
On Tuesday, November 8, US voters went to the polls to elect representatives in an election sandwiched between the Presidential contests.
Historically, the sitting President’s political party suffers losses in the mid-term contests, with control of the House of Representatives and the Senate often changing to the opposing party. Going into the 2022 mid-term, the battles were close. Still, most pollsters forecast that Republican gains would shift the House and Senate to their control, rendering the Biden administration a lame duck until the 2024 election, with gridlock clogging the wheels of the legislature and standing in front of 2020 campaign pledges and the administration’s initiatives.
The red wave never materialized, and while the Republicans appear to have recaptured control of the House, the margin is razor thin. Meanwhile, the Senate could be in the same position as in 2020, with the majority depending on an early December runoff election to determine the US Senator from Georgia depending on delayed results from Arizona and Nevada.
Markets reflect the economic and geopolitical landscapes. The kneejerk reaction to the mid-term elections was selling as the four leading indices, including the S&P 500, DJIA, NASDAQ, and Russell 2000, fell on Wednesday, November 9. However, a lower-than-expected October CPI reading at 7.7% lifted stocks, and the prospects for gridlock turbocharged the rally.
The indices initially declined
- The small-cap Russell 2000 fell 2.68% on November 9.
- The tech-heavy NASDAQ dropped 2.48% the day after the election.
- The most diversified US stock market index, the S&P 500, fell 2.08% last Wednesday.
- On the same day, the bellwether DJIA declined 1.95%.
- The VIX index rose to over the 26 level.
- They all came storming back on Thursday and Friday, and the VIX fell below the 23 level.
No red wave, but Gridlock is back
- Gridlock is a deadlock or political stalemate, making it challenging to pass laws that satisfy the needs of the citizens.
- After two years of an administration and both houses of Congress run by Democrats, Republicans will control at least the House of Representatives.
- In the past, the stock market has embraced gridlock, and markets have rallied.
- The pandemic’s legacy, geopolitical turmoil, and divisiveness make 2022 no ordinary year.
CPI and Crypto Contagion cause confusion
- October CPI increased by 0.4% and 7.7% from the previous year, with the readings lower than the market’s expectations.
- FTX’s collapse caused a liquidity crisis in the cryptocurrency asset class, causing some systemic issues.
- Lower CPI and crypto woes are confusing markets across all asset classes.
- Stocks came roaring back on Thursday, November 10 after the CPI data.
The next two events on the US political scene
- The runoff election in Georgia will determine the Senate majority and the future of the administration’s initiatives.
- The race for the White House in 2024 begins when the Georgia runoff is over.
- Mid-term victories in Florida could shift the focus to a new candidate.
A nightmare for some- A paradise of opportunity for others
- Price variance creates challenges for passive investors.
- Volatility is nourishment for flexible traders with their fingers on the pulse of markets.
- Risk-reward dynamics and discipline separate winners from losers.
- Expect the unexpected in markets across all asset classes, and you will not be disappointed or blind-sighted.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!