[New York Stock Market] US Midterm Election 'Red Wave' Anticipation Drives Rise... Dow Up 1.02%

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices of the U.S. New York stock market closed higher on the 8th (local time) as investors awaited the results of the midterm elections that would reshape congressional power. Midterm elections have traditionally been positive for the stock market. However, this year, due to the Federal Reserve's (Fed) aggressive tightening and the resulting recession concerns being more prominent than in previous years, some analysts believe the impact on the stock market may not be as significant as expected.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 32,160.83, up 333.83 points (1.02%) from the previous session. The large-cap S&P 500 index rose 21.31 points (0.56%) to 3,828.11, and the tech-heavy Nasdaq index gained 51.68 points (0.49%) to close at 10,616.20. This marked the third consecutive day of gains.

By sector, materials and real estate stocks showed upward momentum. Among individual stocks, SolarEdge Technologies surged more than 19% after reporting better-than-expected sales. Department store chain Kohl's jumped 7.34% following strong earnings that exceeded expectations and the announcement of its CEO's resignation next month. McDonald's (+0.72%) and Lockheed Martin (+1.05%) also rose, hitting 52-week highs.

On the other hand, Lyft plummeted nearly 23% due to disappointing quarterly results. Competitors Take-Two Interactive and TripAdvisor also fell sharply by 13.68% and 17.31%, respectively, after their earnings reports. Tesla (-2.93%) continued to face selling pressure, with its intraday market capitalization threatened to fall below the $600 billion mark, roughly half of its value a year ago.

Investors are awaiting the results of the midterm elections held on this day. In this election, 35 of the 100 Senate seats, all 435 House of Representatives seats, as well as dozens of state governors and attorneys general, are being elected. The market expects that once vote counting begins tonight Eastern Time, the Republican Party is likely to regain the majority in the House. The Senate, which was previously very closely contested, is also expected to tilt in favor of the Republicans, resulting in what is called a 'Red Wave.' If the Republicans secure the majority in Congress and check the ruling Democrats, it is anticipated that policy balance will be achieved regarding regulations and government spending, which is favored by investors.

Economic media CNBC reported that investors prefer a divided government stalemate between Congress and the President in Washington. If the Republicans control both the Senate and the House or at least the House, it is expected that policy balance can be achieved against the ruling party. Seth Cohan of Wells Alliance said, "A stalemate would be the best possible outcome for the market," adding, "Generally, the market performs very well under such circumstances." Historically, midterm elections have been positive for the stock market. According to LPL analysis, in 18 midterm elections since 1950, the stock market tended to rise over the following 12 months, with an average increase of 14.7%.

Since the market has already priced in a Republican victory, there is also analysis that a surprise win by the Democrats could cause market volatility. Jan Hatzius of Goldman Sachs said in a report on this day, "If the Republicans win, the market reaction could be quiet because the House results are already expected." He added, "If the Democrats achieve a surprise victory in both the Senate and the House, market participants might anticipate additional corporate tax increases, which would be a burden on the stock market."

However, this year, due to the Fed's aggressive tightening and heightened recession concerns, some analysts argue that the election's impact on the stock market will be limited. Instead, investors are paying closer attention to key indicators that will influence the Fed's future actions, such as the Consumer Price Index (CPI) to be released on the 10th. The October CPI year-over-year increase is expected to slow to 7.9% from 9.1% in June and 8.2% in September. Confirmation of CPI deceleration could support the Fed's easing of interest rate hikes.

Recession concerns have resurfaced. Investment bank UBS forecasts that the U.S. economy will enter a recession in the second to fourth quarters of next year. It also expects the S&P 500 index to bottom out at 3,200 during this period, nearly 16% lower than the previous day's closing price. UBS projects the S&P 500 to recover to 3,900 by the end of next year, with a 2024 forecast of 4,400. UBS analyst Case Parka stated, "2023 is essentially a year of inflation, financial easing, and the tension between growth and earnings impact," adding, "If the economic situation improves quickly, the market could reach 4,400 (the 2024 forecast) within 2023."

In the New York bond market on this day, Treasury yields fell as investors watched the midterm elections. The 10-year U.S. Treasury yield dropped to around 4.14%, and the 2-year yield, sensitive to monetary policy, fell to 4.67%. The dollar weakened. The Dollar Index, which measures the dollar's value against six major currencies, declined to around 109. After market close, earnings reports from companies such as Disney are scheduled.

The cryptocurrency market was volatile as Binance, the world's largest cryptocurrency exchange, announced plans to acquire competitor FTX. Bitcoin fell below the $20,000 level but slightly recovered after the Binance acquisition news, reducing its losses. As of 4:11 p.m. Eastern Time (6:11 p.m. Korea Time), Bitcoin was trading around $18,300, down 11.7% from the previous session.

International oil prices declined. On the New York Mercantile Exchange, December West Texas Intermediate (WTI) crude oil closed at $88.91 per barrel, down $2.88 (3.1%) from the previous session. This was due to disappointment as no concrete news followed earlier hopes for easing China's zero-COVID policy. Additionally, expectations that oil prices would fall if the Republicans gain dominance in the midterm elections added downward pressure.