I. Why Wall Street Is Cheering the Blue Sweep
Ahead of Tuesday's midterm elections, we warned that a Democratic sweep of Congress could deliver a cold shower to Wall Street. It still could, but it didn't do so today. Democrats captured both chambers of Congress, flipping seven Republican-held Senate seats, including historic victories in Texas, Kansas, and South Carolina. Financial markets put a positive spin on the blue wave.
Oil prices fell on hopes that the US and Iran are more likely now to resolve their war diplomatically. If so, then the outlook for inflation will improve. So the Fed might not have to raise the federal funds rate as much. The federal deficit might not widen further if Democrats refuse to increase defense spending, while President Donald Trump vetoes their attempts to provide Medicare for all. If Democrats slow the AI buildout, hyperscalers' profits and free cash flow will increase. Fewer AI-related bond issues would also help keep a lid on bond yields.
Initially, Nasdaq-100 futures plunged as much as 2.4% overnight, while S&P 500 futures fell 1.4%. But the selloff reversed after Trump struck a surprisingly conciliatory tone, congratulating Democrats and saying he was willing to work with them.
That is when the cheer on Wall Street started. The Dow surged 3.0% today, the strongest post-midterm rally since 1982. The S&P 500 jumped 1.6%, its best session in three months. The Nasdaq-100 advanced 0.9%. The relief rally extended beyond equities. The 10-year Treasury yield fell to 4.90%, back in what we have called the "old normal" range of 4.00%-5.00% (chart).
The dollar index (DXY) fell more than 1.5%, its biggest decline since September. Gold rallied back above $4,000 an ounce. It might be finally bottoming.
