Stock futures fall slightly as control of Congress is still unclear - CNBC

2 months ago 19

Traders work on the floor of the New York Stock Exchange (NYSE) on October 27, 2022 in New York City. Stocks continued their upward gains Thursday with the Dow rising nearly 400 points following a new GDP report that beat expectations. 

Spencer Platt | Getty Images News | Getty Images

Stock futures were slightly lower — following recent market gains — as results of the midterm elections provided no clear answers about who would control Congress yet.

Futures tied to the Dow Jones Industrial Average fell 86 points, or about 0.3%. S&P 500 futures shed 0.2% and Nasdaq 100 futures were about flat.

Stocks are coming off three-straight days of gains into the election, where Wall Street was expecting Republicans to gain ground and block any future tax and spending plans. The Dow climbed 333 points on Tuesday for its third-straight session of gaining more than 1%.

But control of Congress was not clear. NBC News was not yet projecting control of the House of Representatives with an NBC estimate suggesting Republicans could win 220 seats, which would be a narrow majority.

In one of the key races that could determine Senate control, Democrat John Fetterman defeated Republican Mehmet Oz for the pivotal Senate seat in Pennsylvania, according to an NBC News projection. Oz had the backing of former President Donald Trump, whose endorsed candidates saw spotty levels of success across the country. Critical Senate races in Georgia and Nevada were unresolved.

Morgan Stanley chief U.S. equity strategist Mike Wilson said on CNBC's "Closing Bell" that if it does end up being divided government it could help ease concerns about inflation and higher interest rates going forward.

"It looks like the House will go the way of the Republicans," Wilson said. "That means gridlock. Probably, less fiscal spending will be achieved."

While the election captivated market attention, investors may want to move on now as the Federal Reserve raises interest rates to bring down inflation, potentially tipping the economy into recession.

The political landscape "will fascinate the Washington chattering class, but for the markets, the focus will shift to whether a recession looms, whether the Fed will end its tightening this winter, and whether a truce and negotiations are possible in the Ukraine war," wrote Greg Valliere, chief U.S. policy strategist at AGF Investments.

The market's recent rally occurred at the front end of a strong seasonal period. Historically, stocks tend to rise after midterm elections and the policy clarity it brings, and the final two months of the year are considered a bullish period for investors.

Shares of Facebook parent Meta Platforms rose 3% premarket after the social media giant announced it will be laying off more than 11,000 workers. Founder and CEO Mark Zuckerberg said he was too optimistic about growth and now needs to streamline the company.

One stock that weighed on futures was Disney, which fell more than 8% in early trading after the entertainment giant missed estimates on the top and bottom lines for its fiscal fourth quarter.

European markets pull back as investors await U.S. midterm results

European markets were slightly lower on Wednesday as global investors await the results of the U.S. midterm elections.

The pan-European Stoxx 600 was down 0.6% by late morning, with travel and leisure stocks shedding 1.3% to lead losses as most sectors and major bourses slid into the red.

- Elliot Smith

Control of the House will not be determined tonight, NBC News says

Control of the House of Representatives will not be decided on election night, according to NBC News.

Republicans only need to gain 5 seats to take the House and were considered heavy favorites entering the day, but the red wave expected by some investors has failed to materialize. Democrats appear to have won some surprise victories in Ohio and North Carolina.

The NBC News election model currently estimates that the Republicans will end up with a three-seat advantage in the House, but that projection has a large margin of error.

If Democrats continue to hold their ground, control of the House could remain uncertain for days or even weeks. There are several competitive House races in California, a state that often takes a long time to count votes.

— Jesse Pound

Hassan wins reelection in New Hampshire, NBC News projects

NBC News is projecting that Democratic Sen. Maggie Hassan will win reelection in New Hampshire. The state was seen as a potential pick-up for Republicans, as New Hampshire is a swing state that is also projected to reelect a Republican governor.

While Hassan's seat was not considered to be as competitive as Pennsylvania and Georgia, the Democrat's ability to fend off a challenger could be an early sign that the midterm election will not feature the "red wave" expected by some investors.

— Jesse Pound

China's producer prices drop, inflation slows in October

China's producer price index fell 1.3% in October on an annualized basis after rising 0.9% in September, beating estimates for a 1.5% contraction in a Reuters poll.

The nation's October PPI marks the first decline since December 2020, according to FactSet data.

China's consumer price index rose 2.1% in October compared to a year ago, easing after climbing 2.8% in September.

The onshore and offshore Chinese yuan hovered around 7.2500 levels shortly after the economic data release.

Read the full story here.

— Evelyn Cheng, Jihye Lee

Divided government is a positive in the inflation fight, says Minerd

Guggenheim Partners' global CIO Scott Minerd said on CNBC's "Business on the Ballot" that Republican gains in Congress could help inflation ease in the coming years.

"Divided government is a great outcome. ... Divided government is going to mean very little movement on the fiscal side, which means we aren't going to get tax cuts nor are we going to get much of an increase in government spending. That's good from a standpoint of allowing the economy to cool off more and may actually limit the amount of hiking that the Fed has to do," Minerd said.

Most key races remain too close to call, according to NBC News.

— Jesse Pound

Market has been expecting a divided government for a while, Boockvar says

Stock futures have been muted so far Tuesday evening, and Peter Boockvar, chief investment officer at Bleakley Global Advisors, said there might not be a big action since a divided government is widely expected.

"We have to distill what it means for the economy and markets," said Boockvar, adding the only surprise that could come after the polls close is whether Republicans take the Senate, since the GOP is clearly expected to take control of the House of Representatives.

"It's still going to be that the end result is divided government, which I think the market has been expecting for a while now," Boockvar said.

— Patti Domm

Elon Musk sells nearly $4 billion of Tesla stock

Elon Musk sold 19.5 million shares of Tesla, worth $3.95 billion, according to filings with the Securities and Exchange Commission. The sales came after Musk acquired Twitter for $44 billion.

The selling might take a toll on Tesla's stock, which will begin premarket trading at 4 a.m. ET. Shares of the EV company is down 16% this month alone.

— Yun Li

Either Senate outcome would be market-friendly, LPL Financial says

Markets have historically preferred a mixed government, and the trend is in play if Republicans take the House, independent of what happens in the Senate, according to LPL Financial.

"Don't depend on the Senate," said LPL's Barry Gilbert and Jeffrey Buchbinder in a note. "Midterms usually provide something of a course correction from presidential elections ... and markets may anticipate prospects of a better policy balance ahead."

The research firm noted that the S&P 500 has been higher 18 out of 18 times in the following year after midterm elections dating back to 1950, with nearly identical historical returns under Democratic and Republican presidents.

— Yun Li

Market action signals a Republican House, Strategas' Clifton says

Midterm elections have been a historical tailwind for the market, according to Dan Clifton, head of policy research at Strategas Research.

"Historically you rally into the election and over the next six months you are positive six months every single time since 1950," Clifton said on CNBC special "Business on the Ballot."

The tale of the tape during Tuesday's rally is the advance in biotech, pharmaceutical, financial and defense stocks, which signaled that the market thinks the Republicans will at the very least win the House, Clifton said.

Small caps, tech and financial firms are most vulnerable to higher taxes and tougher regulations, and they could benefit from a Republican Congress, Clifton said.

— Yun Li

Don't jump to conclusions on election night, New York Life's Goodwin says

Investors should be cautious about not overreacting to early returns on election night, according to Lauren Goodwin, economist and portfolio strategist at New York Life Investments.

"Beware premature conclusions on election night. The increased use of mail-in voting may mean that close races can't be called right away. Swings in leadership are possible," Goodwin said in a note to clients on Tuesday.

Equity futures begin trading before polls in most states have closed. Some races may not be called until later this week, and others could go to a run-off, including a key Senate race in Georgia.

Even once results are clear and policy priorities are laid out, investors should still keep time as a key variable in making decisions around politics, Goodwin added.

"More often than not, policy impacts markets indirectly and over a medium- or long-term time horizon. Take the recently passed Inflation Reduction Act; the implications for the inputs to infrastructure construction may be clear, but externalities of any technological advancement, process challenges, and other impacts are far from certain," Goodwin said.

— Jesse Pound

Disney shares fall after earnings miss

Bob Chapek, Chief Executive Officer of Disney, speaks at the 2022 Disney Legends Awards during Disney's D23 Expo in Anaheim, California, September 9, 2022.

Mario Anzuoni | Reuters

Shares of Disney fell more than 6% in extended trading after the company's fiscal fourth quarter report missed Wall Street estimates on the top and bottom lines.

Disney's disappointing results came despite stronger-than-expected growth in its streaming video business.

Here's a look at the key numbers:

Earnings per share: 30 cents per share adj. vs 55 cents expected, according to a Refinitiv survey of analystsRevenue: $20.15 billion vs $21.24 billion expected, according to RefinitivDisney+ total subscriptions: 164.2 million vs 160.45 million expected, according to StreetAccount

Disney reported a loss of more than $1.4 billion in its direct-to-consumer division for the quarter. During the pandemic, investors cheered subscriber growth but have grown more skeptical as interest rates have risen and the slowdown of Netflix's growth led to questions about how big the streaming market will be.

— Jesse Pound, Sarah Whitten

Pennsylvania, Georgia and Nevada's Senate races are in focus, Cowen says

Cowen Washington Research Group's Chris Krueger said investors should focus on the big Senate races in Pennsylvania, Georgia and Nevada tonight, and the party that wins two-thirds of these states will likely take the majority.

The research firm's base case is for the Republican party to seize control of both the House and Senate. Krueger said a divided government means no new taxes for the next two years, as well as no more fiscal stimulus.

Cowen believes that numerous races will take days to count mail-in ballots.

— Yun Li

Stock futures open little changed

Stock futures were calm at 6 p.m. ET after three straight positive days for Wall Street. Dow futures dipped about 50 points, or less than 0.2%, while S&P 500 and Nasdaq 100 futures hovered near the flatline.

Some polls in the U.S. have now closed, but it will likely be several hours at least until investors get clarity on key midterm races.

— Jesse Pound

Dow is following a historical pattern of bullish trading

The blue-chip Dow has gained in the four trading days in the run-up to Tuesday's midterm elections, following a short-term positive trading pattern.

According to the Stock Trader's Almanac, the Dow has consistently risen before and after midterm elections for nearly 90 years.

"An impressive 2.8% has been the average gain during the eight trading days surrounding midterm election days since 1934. This is equivalent to roughly 966 Dow points per day at present levels," the Almanac says.

— Jesse Pound

Watch the ‘Republican portfolio’ names including energy stocks

S&P 500 usually gains big in year after midterms — even in a recession

History shows the stock market typically rises the year after midterm elections — even with a recession.

The year following midterms has historically been a strong one for the S&P 500, with the benchmark gaining 20.1% on average, according to Citigroup data going back to 1960.

Even when there's a recession the next year, returns are surprisingly robust, with the S&P 500 rising 24.4% on average during three instances in 1974, 1990 and 2006, Citi said. That's especially pertinent now, with many economists expecting an economic downturn in 2023 in the wake of the Federal Reserve's aggressive rate hikes to tame inflation.

— Yun Li

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