Wall Street awaits the results of Tuesday’s midterm elections like the rest of the world, but the traders say this week’s inflation report may prove to be much more substantial for the markets.
“Obviously this midterm election — because democracy is on the ballot — is a big deal in the eyes of the people,” Peter Tuchman, a veteran stock exchange trader, told CNN Business on Tuesday. New York. “But how much that 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 generally think stalemate is a good thing because it means one side can’t push through legislation that messes things up.
In this case, that means Republicans can’t pass unfunded tax cuts and Democrats can’t pass unfunded spending programs, which would worsen inflation which has already been at high levels for decades, and raise interest rates.
“Less government, complete gridlock, will likely benefit the stock market,” Tuchman said.
Of course, the stalemate may not turn out to be good if it leads to a fight against the debt ceiling or if it limits the will of Congress to cushion the blow of a possible recession.
If Republicans take control of at least the House of Representatives, the markets could have a “silent” reaction because it is widely expected, Goldman Sachs told clients in a report Monday.
Andrew Frankel, co-chairman of Stuart Frankel, agrees that a GOP victory is “prepared” and unlikely to trigger a major market rally. Rather, Frankel said, it could be a news sell event where markets pull back after getting confirmation of a GOP victory.
Frankel warned that a surprisingly strong night for Democrats that allowed them to retain control of both the House and the Senate would lead to a “significant decline” in stocks.
Several NYSE traders told CNN that the midterm elections could be overshadowed by Thursday’s consumer price index, an inflation indicator that has become arguably the most important economic gauge of the month.
“This CPI number is where all eyes are. It’s much bigger than what’s happening today,” Tuchman said.
A higher-than-expected inflation reading could reignite fears about massive interest rate hikes from the Federal Reserve.
“Markets can adapt to virtually anything except the unknown,” Tuchman said. “The biggest long-term unknown in the market is the story of inflation.”