By Ryan Casey Stephens, FPQP®
Special Contributor
There are four schools of thought in U.S. politics, though only three get a vote. Left, right, and center get most of the attention during campaign season while the fourth is often overlooked. Despite its inability to walk into a voting booth to cast a ballot, Wall Street has quite a say in what will happen to this country following the midterm elections this week.
Some might disagree, but it seems safe to say that Tuesday’s market ended higher because the market was beginning to price in a red wave that appeared imminent. While we won’t dive into why Republicans failed to take decisive control of the House and Senate, we should examine how stocks and bonds handled the news. And perhaps more important than observing the present is this question: What does the red ripple mean for stocks, bonds, and mortgage rates through the rest of the year?
Hope of Certainty Replaced by Fear of the Unknown
Let’s begin with a simple concept – Wall Street likes to know the rules of the game.
There’s an old quote that goes, “You have to learn the rules of the game, and then you have to plan better than anyone else.” Generally, the modern Republican party tends to reward Wall Street with looser corporate regulation and lower taxes, but even if we’d had an unexpected blue wave I believe today’s stock market would be in better shape than it is currently.
Simply put, when investors know who will be creating policy and what to expect, fears subside and volatility decreases. Unfortunately, the clarity we hoped would come on Election Day has been replaced with confusion that might drag on for some time. While the Republicans seem poised to take at least a small lead in the house, the Senate control might come down to a runoff between two candidates in Georgia – a process that’s neither quick nor predictable. It’s not known who will make the rules, if anyone, and what agendas might be pursued during the next two years. Stocks today are suffering for that reason, but not that reason alone.
Late Night Tech Meltdowns Distract
When all eyes should have been on the political landscape, two news stories were interrupting the fray on Twitter and around the internet. The crypto token FTX suffered a legendary meltdown and Mark Zuckerburg confirmed Meta would lay off thousands of employees on Wednesday. As if the stunning shift in election momentum around 9 p.m. central wasn’t bad enough, these two news stories appeared to be like wildfires popping up all around us, adding to the mayhem.
The level of catastrophe for those two headlines should not be understated, now that we know their full effect. First, the FTX meltdown instantly vaporized $2 billion in equity, much of which belonged to market-moving hedge funds and private equity. Second, Meta’s cull totaled more than 11,000 employees – a number so large that it will likely make up more than 4 percent of the initial jobless claims report on which it falls. Keep in mind that report tracks new jobless claims for the entire nation.
CPI And The Fed Retake The Stage
For anyone reading along who, like myself, had hoped Election Day might give us a moment to forget about the Fed and inflation, I’m afraid we’re only going to be let down.
As Wall Street turns its eyes away from Election Day and to the rest of the week, the ever-important CPI inflation report finally returned the cooler reading we’ve been waiting for. Mortgage bonds opened with nothing short of rejoicing this morning by recovering a month’s worth of lower interest rates instantly, but we shouldn’t get ahead of ourselves. While 7.7 percent inflation is a welcome change from previous readings, the Fed’s decision on December’s rate hike will be crucial. If the Fed is seen becoming too soft while inflation still soars it could spark panic and sell-offs in markets.
Just Play The Long Game
The takeaway from all of this is simple: be patient and hang out. Bright flashing signs point to a rough economic season next year but an improvement in many key areas. It might sound morbid to hope for pain, but a massive slowdown might be our only chance against gigantic inflation. Don’t let the other headlines distract you – the watering-down of the dollar is our gravest threat and inflation must be tamed.
If there isn’t decisive control of both the House and Senate, gridlock will make it more difficult to pass spending bills, aiding in the fight against a depreciating dollar. Further Fed rate hikes and widespread layoffs into next year could convince consumers to slow our spending. The road ahead won’t feel easy. But as great as these setbacks might seem at present, they do not derail the long-term hope we feel. After we all put 2022 to bed and 12 months go by, let’s reconvene again this time next year. I bet we’ll see higher unemployment and slower consumer spending, but much cooler inflation readings, and with any luck, considerably lower mortgage rates.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
