Wall Street is awaiting the results of Tuesday’s midterm elections like the rest of the world, but traders say this week’s inflation report could prove far more consequential for markets.
“Obviously, these midterm elections, because democracy is on the ballot, are a big deal in the eyes of the population,” Peter Tuchman, a veteran New York Stock Exchange trader, told CNN Business on Tuesday. “But how much it weighs on the economy is a good question.”
Markets have rallied in recent days as investors bet Republicans will take control of at least one chamber, leading to a divided government. Traders tend to believe that deadlock is good because it means one side can’t push through legislation that messes things up.
In this case, that means Republicans can’t enact unfunded tax cuts and Democrats can’t push through unfunded spending programs, both of which would worsen inflation that’s already at decade-high levels, and increase interest rates.
“Less government, complete lockdown, will probably benefit the stock market,” Tuchman said.
Of course, gridlock might not be a good thing if it leads to a fight over the debt ceiling or if it limits Congress’s willingness to cushion the blow of a potential recession.
If Republicans gain control of at least the House of Representatives, markets may have a “muted” reaction because that is widely expected, Goldman Sachs told clients in a report on Monday.
Andrew Frankel, co-chairman of Stuart Frankel, agrees that a GOP victory is “covered” and shouldn’t lead to a major market rally. If anything, Frankel said, it could be a sell-the-news event where markets pull back after getting confirmation of a GOP victory.
Frankel warned that a surprisingly strong night for Democrats that allows them to retain control of both the House and Senate would cause a “significant downward move” for stocks.
Several NYSE traders told CNN that the midterm elections may be overshadowed by Thursday’s consumer price index, an inflation gauge that has become arguably the month’s most important economic metric. .
“That CPI number is where all eyes are. It’s much more important than what’s happening today,” Tuchman said.
A higher-than-expected inflation reading could rekindle fears of massive interest rate hikes by the Federal Reserve.
“Markets can adapt to pretty much anything except the unknowns,” Tuchman said. “The biggest long-term unknown in the market is the inflation story.”