Wall Street is waiting for the results of Tuesday’s midterm election like the rest of the world, but traders say this week’s inflation report may prove to be far more consequential to markets.
“Obviously this midterm election — because democracy is on the ballot — is a big deal in the eyes of the population,” Peter Tuchman, a veteran New York Stock Exchange floor 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 divided government. Traders typically believe gridlock is good because it means one party 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 is already at decades-high levels, and lift interest rates.
“Less government, complete gridlock, will probably benefit the stock market,” said Tuchman.
Of course, gridlock may not prove to be good if it leads to a debt ceiling fight or if it limits the willingness of Congress to cushion the blow from a potential recession.
If Republicans win 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 Monday.
Andrew Frankel, co-president of Stuart Frankel, agrees that a GOP victory is “baked in” and shouldn’t trigger a major market rally. If anything, Frankel said, it could be a sell-on-the-news event where markets retreat after getting confirmation of a GOP win.
Frankel warned that a surprisingly strong night for Democrats that allows them to retain control of both the House and Senate would cause a “meaningful move lower” for stocks.
Multiple NYSE traders told CNN that the midterm election may be overshadowed by Thursday’s Consumer Price Index, an inflation gauge that has become arguably the most important economic metric of the month.
“That CPI number is where all eyes are. It’s way more important than what happens today,” said Tuchman.
A hotter-than-expected inflation reading could reignite fears about massive interest rate hikes from the Federal Reserve.
“Markets can adapt to virtually anything except unknowns,” Tuchman said. “The largest long-term unknown in the market is the inflation story.”