The Market Today
Why a Split Congress Might Not Always Be Positive
by Craig Dismuke, Dudley Carter
Election Fallout – Why a Split Congress Could Be Different This Time: With some races still yet to be officially called, Congress will be divided for the next two years after Democrats gained between 30 and 40 seats in the House and Republicans somewhat surprisingly added what appears to be 3 seats in the Senate. From an economic perspective, the question now becomes what positions the new Congress will take and how the President will respond. Will there be deeper investigations into the White House or will there be bipartisan legislation? While the President prides himself on being a dealmaker, the early indications are not positive. Before the dust has fully settled, threats of investigations have already begun. Some of the final answer to this question will come from who is chosen to lead Democrats in the House. On policy, Tax Cuts 2.0 appears to be off the table now but an infrastructure spending package is more likely. However, with a divided Congress, Senate Republicans may come back to their anti-deficit roots, stifling any short-term stimulative initiatives. Time will tell, but gridlock appears to be the most likely result. This will leave the President to pursue his agenda through executive actions/orders and through his Cabinet, likely focusing on deregulation, trade, immigration, and drug pricing.
While gridlock has historically been a positive for risk assets (stocks in particular), with analysts citing stock price performance since 1950 under Republican presidents and split Congresses, this scenario is likely to play out differently. Stock prices (S&P 500) are up 32% since President Trump was elected – on optimism about the pro-business Administration and Congress. Given that performance, there appears to be an optimism premium in risk prices after two years of deregulation and tax cuts. Coming on the heels of that environment, gridlock may not be sufficient to keep optimism so elevated.
As for fixed income markets, the results are generally as-expected although President Trump emerges with a bit more political capital than previously expected. If gridlock reigns, the risk of accelerating growth and faster inflation will be materially lower. This should be constructive for fixed income and turn investors’ focus back to the fundamentals of the economy rather than stimulus effects.
Yesterday – Stocks, Yields Close Near Their Daily Highs: U.S. stocks spent most of the low-volume day in positive territory as investors awaited the outcome of the U.S. midterm elections. The S&P 500 quickly erased an opening drop, recovered from an early-afternoon bout of weakness, and rallied sharply to close up 0.6% and at its highest levels of the day. All 11 sectors and 77% of the underlying companies finished higher. Materials and industrials were the top two performers, both adding more than 1%, while energy companies lagged. Crude prices weakened for a seventh straight session, with WTI down another 2% on Tuesday to close below $62 per barrel and at the lowest level in eight months. The White House announced waivers for eight different countries that will allow them to keep buying Iranian crude, adding to angst of oversupply caused by increasing U.S. inventories and OPEC’s pledge to ramp production. The daily drop increased WTI’s cumulative loss from a peak above $76 on October 3 to more than 19%. The Dow and Nasdaq followed similar paths to almost identical gains. Treasury yields tracked equities’ fluctuations, rising early, receding midday, but pushing up to close near their daily tops. The 2-year yield (2.93%) added 2.0 bps on the day, the 5-year yield (3.06%) rose 2.7 bps, and the 10-year yield (3.23%) rose 2.7 bps.
Overnight – Stocks Rise, Dollar Weakens, Yield Curve Flattens after Midterms End As Expected: U.S. stock futures strengthened overnight, the Treasury curve flattened with longer yields moving lower, and the Dollar was weaker across the board after Tuesday’s midterm elections offered no major tail-risk surprise. U.S. equity futures and Treasury yields fell early after Democrats flipped their first house seat in Virginia, potentially beginning the “blue wave” some pollsters were projecting. But as more results rolled in, showing Republicans performing better than some had expected, both stocks and yields reversed higher. As most races began to be called, and it appeared Congressional power would split as expected, Treasury yields moved back down despite stocks holding onto their gains. Futures for the S&P 500 were up 0.7% earlier while the Nasdaq was even stronger, adding nearly 1%. Shorter Treasury yields were higher, the 2-year yield had risen 1.2 bps, but longer yields remained under pressure. The 10-year yield was down 2.4 bps but off the lows of the overnight session. As a result, the spread between the two fell to 25.6 bps, the least since October 2. The Dollar slipped 0.5% and at a three-week low. Elsewhere, Asian markets ended mixed and European equities are notably firmer, pressuring core yields in the region higher.
JOLTS Shows Labor Market Remained Strong in September: September’s JOLTS report continued to show ample employment opportunities available for jobseekers in the U.S. As expected, total openings pulled back in October but held above 7MM for a third month in a row. In addition, September’s series record was revised up from 7.14MM to an even-stronger 7.29MM. Month-over-month, there were fewer openings across most sectors, excepting trade/transportation/utilities, education and health services, leisure and hospitality, and other. Even with a smaller number of openings, because of the big drop in total unemployed that occurred in September the ratio of unemployed workers per total job openings fell to 0.851%, a new record-low. All of the other metrics monitored by the JOLTS Survey – hires, quits, and layoffs – also pulled back from September. Overall, the data confirmed the continued strength of the U.S. labor market.