Gridlock Delayed, Gridlock Denied? Stocks Point Lower as Final Election Results Roll In

The stock market is suffering uncertainty this morning as election results remain unclear. Market-friendly “gridlock” still seems like the most likely outcome, but we may not have clarity for a while. Investors may want to take extra care as the market is vulnerable to political news headlines.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/
5 min read
Photo by Getty Images

Key Takeaways

  • Market Marches in Place as Investors Await Election Results
  • Volatility Ticks Higher Amid Election Uncertainty Ahead of Tomorrow’s Inflation Data
  • Disney’s Earnings Disappointment Could Hurt the Dow

Shawn Cruz, Head Trading Strategist, TD Ameritrade

(Wednesday Market Open) As Republicans and Democrats wrestle for control of the House and Senate after Tuesday’s vote, the atmosphere is subdued on Wall Street. Neither party gained obvious control of the Capitol based on results available early this morning, and the market traded nearly unchanged ahead of the opening bell.

It’s unclear whether we’ll know today which party triumphed, and uncertainty doesn’t play to Wall Street’s strengths. An impressive rally heading into election day hangs in the balance.

Predictions of a “red wave” didn’t seem to materialize overnight despite expectations of its likelihood over the past few sessions If results turn the other way, certain sectors like energy and health care that posted significant gains over the last month could become vulnerable to a potential pullback.

Having said that, the most likely outcome still appears to be market-friendly gridlock in Washington, though it may be a while until we know who controls the Senate due to a possible run-off election in Georgia. 

Wall Street tends to like it when things don’t get done in Washington, and is particularly sensitive now to any emerging fiscal policies that might blunt the Federal Reserve’s attempts to slow the economy. Division in D.C. would have a chance of slowing any major changes in Congress’s spending over the next two years. If you want gridlock, a split Congress is probably the best scenario for the markets.

Volatility shifted into slightly higher gear yesterday and remains above recent lows (see more below) but so far, it doesn’t point to a major sell-off shaping up. As we know, that can change quickly. If you’re trading today, consider extra caution, because news developments could have an impact. 

Potential Market Movers

A few alarm bells rang yesterday, even before a single vote was counted:

  • First, the Cboe Volatility Index® (VIX) jumped 4% and climbed back above 25 (it then traded above 26 for a while overnight). That might not be too surprising considering the election, but it could be something to keep an eye on. If the VIX continues rising and looks like it might test 30, that would suggest the rally might be flagging. It’s odd for the VIX and stocks to rise at the same time and suggests one or the other may need to turn around.
  • In addition, major stock indexes closed well off their peak levels. The S&P 500® index (SPX)wasn’t able to preserve intraday gains that at one point pushed it above 3856, the level it closed at last Tuesday before the Federal Reserve and Fed Chairman Jerome Powell put their elbows in the market’s eye. Settling above that level might’ve been technically helpful.
  • Also, the Russell 2000® (RUT) small-cap index actually lost a little ground Tuesday, and sometimes its moves can be a harbinger of things to come for the broader market.
  • Behind the election headlines Tuesday was a terrible day all-around for cryptocurrencies and the stocks related to them. Bitcoin fell to a two-year low Tuesday following a merger between Binance and FTX, the two largest crypto exchanges, in what Binance called a “liquidity crunch.” It’s another volatility event for crypto-related stocks, which arguably aren’t for the faint of heart. While this may summon fears of “contagion-risk,” meaning an impact on broader markets, any contagion would likely spread only to the riskier parts of the market.
  • Disney (DIS) earnings and outlook disappointed, pushing shares sharply lower. This could weigh on the Dow Jones Industrial Average ($DJI), as DIS is a component.

In the meantime, the market continues to get a tailwind from the U.S. Dollar Index ($DXY), which fell again Tuesday and closed below 110 for the first time since September 19. This gave Gold (/GC) a boost as front-month futures closed above $1,700 an ounce for the first time in a while. Gold might also have found buyers looking for perceived safety as the crypto market sagged, though no investment is truly “safe.”

Beyond the election, a couple of Fed speakers are out on the circuit today. Sometimes their words can increase volatility. And September Wholesale Inventories are due at 10 a.m. ET.

The weekly Crude Oil Inventories report from the Energy Information Administration later this morning is another report to look out for, considering recent low energy inventories.Total U.S. crude stocks recently fell to levels not seen in more than a decade, partly due to the government’s heavy withdrawal of supplies from the Strategic Petroleum Reserve (SPR).

Earnings Roll On

Election fireworks or not, earnings keep on coming. Yesterday afternoon brought results from DIS, and this morning, investors got a look at homebuilder DR. Horton (DHI). Electric car-maker Rivian (RIVN) is expected to report this afternoon.

DIS earnings ended up disappointing Wall Street (and maybe America’s Main Street too). Shares plummeted more than 8% after the closing bell due to the company missing analysts’ earnings and revenue expectations. No fireworks there.

Except for Disney+ subscriber additions, which easily beat Wall Street’s estimates, DIS came up short in nearly every category investors follow, including theme park revenue. Part of the problem on that side of the business is the continued COVID-19-related shutdown of the company’s Shanghai theme park; something DIS has no control over. Still, investors had plenty to contemplate among things DIS does control. It’s about to launch an ad-supported streaming tier even as the advertising market looks increasingly soft. That appears to be one thing rattling investors.

DHI earnings also disappointed and shares fell. Both earnings per share (EPS) and revenue came up short of Wall Street’s expectations. No one who follows the mortgage market should be surprised to hear that DHI saw sales orders fall double digits and the cancellation rate jump. In its press release, DHI referred to these headwinds, but also noted that home supplies remain tight and demographics favor the housing market over the longer term.

Shares of RIVN have had a nice run since posting a 52-week low below $19 back in June. They quickly accelerated back up above $30 and managed to stay there, even making a couple recent runs to $40. One boost came from the company’s deal to supply electric delivery vans to Amazon (AMZN). They’ve already supplied the first 1,000 electric vans in what’s expected to ultimately be a 100,000-van fleet. Look for updates on that in RIVN’s earnings call. The question, according to trade media, is whether RIVN can keep up with production goals amid inflation concerns, rising interest rates, climbing labor costs, and tighter profit margins. The company will likely provide updates on those challenges as well.

Up Next: Consumer Price Index

October’s Consumer Price Index (CPI) report arrives Thursday morning before the market opens and looms large as the second half of the week gets underway. Consensus on Wall Street is for:

  • Headline CPI growth of 0.7% compared with 0.4% in September
  • Core CPI growth of 0.5% compared with 0.6% in September

The expected large jump in headline CPI likely reflects higher food and energy prices, both of which get stripped out of the core CPI number. A slowdown in core CPI might get a positive market response even if it’s accompanied by a higher headline number, simply because food and energy prices are so volatile month to month.

Keep an eye on housing costs too, which make up an outsized percentage of the CPI. Back in September, housing prices rose 0.7%, pretty close to the average monthly gain since last spring. The housing market has been under a lot of pressure the last month or two from rising mortgage rates, though supply remains thin. Any kind of slower climb in housing prices would likely be welcomed by the market.

Going into the election and CPI, November started with a bang. The SPX is up nearly 6% so far this month. That doesn’t hold a candle to the Dow Jones Industrial Average® ($DJI), however, which has risen more than 13%.

Reviewing the Market Minutes

Ideas that gridlock might grip Washington, along with continued softness in the U.S. dollar, helped boost stocks Tuesday

Here’s how the major indexes performed Tuesday:

  • The Dow Jones Industrial Average® ($DJI) climbed 333.83 points, or 1.02%, to 33,160.83.
  • The Nasdaq® ($COMP) rose 51.68, or 0.49%, to 10,616.20.
  • The Russell 2000® (RUT) fell 0.05% to 1808.93.
  • The SPX rose 21.31, or 0.56%, to 3828.11.

Here’s how Treasury yields finished Tuesday:

  • The 2-year Treasury yield fell nearly 7 basis points to 4.66%.
  • The 10-year Treasury yield (TNX) fell more than 8 points to just below 4.13%.

CHART OF THE DAY: ‘OLD ECONOMY’ OUTPERFORMS. The Industrials Select Sector Index ($IXI—upper left) and the Energy Select Sector Index ($IXE—upper right) have broken out to new highs in relative strength (green lines) in the last six months. The Materials Select Sector Index ($IXB—lower left) has recently seen a surge in relative strength, while the Consumer Staples Select Sector Index ($IXR—lower right) is testing its relative strength highs. Consumer-related sectors like staples and discretionary tend to struggle during high inflation as higher costs cut into profit margins. However, energy and materials tend to do better as higher commodity prices help to expand margins. Growth in  energy and materials have historically been followed by higher capital expenditures such as new machinery and equipment, which is good for the industrials sector. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Paying Attention? Do more attentive consumers provide a potentially clearer view of inflation expectations? Yes, say researchers at the Federal Reserve Bank of Cleveland, who found that consumers more “alert” to inflation provide more “informative,” “less sticky,” and “well-considered views of what will happen to inflation” than others. Starting in March 2020, the Cleveland Fed began running a daily survey on how consumers were responding to COVID-19 and how it was likely to affect the economy including their inflation expectations. Using that data set, researchers found that “the (inflation) forecasts of even the attentive respondents have steadily and consistently risen over the last two years. But inattentive respondents on average forecast much higher inflation.” The Cleveland Fed research points out that back in August, Federal Reserve Chair Jerome Powell reminded the audience in Jackson Hole that “rational inattention” provides a “useful insight” into how actual inflation may affect expectations about inflation’s future path. Powell said at the time: “When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to focus their attention elsewhere.”

AAPL Not Far Off Lows: Apple’s (AAPL) logistical problems grew worse this week as it confirmed iPhone production slowdowns in China. COVID-19-related shutdowns continue to plague AAPL and other big U.S. companies, whether they manufacture in China, sell products there, or both, which AAPL does. The technology giant’s shares fell below $140 yesterday and should remain on investors’ radar for possible clues into broader market performance. Many see AAPL as a beacon of sorts, providing insight into how the rest of the market might perform. In late October and early this month, shares of many “mega-cap” shares, including Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT), hit 52-week lows. AAPL managed to avoid that, perhaps providing a bit of a positive vibe that played into the market’s ability to bounce off recent lows. If AAPL finally sputters due to its latest logistical issues, it will be interesting to see where other mega-caps, as well as the broader market, goes because all these companies have such a heavy weight on the SPX. The level to watch for AAPL is $129.04, the intraday 52-week low it reached on June 16. AAPL traded just above $140 by midday Tuesday, down 23% from its 52-week peak.

Mega-Cap Shuffle? Though the tech “mega-caps” mentioned above still swing plenty of weight in the SPX, the market’s movements this year have made things a little more democratic. As of yesterday, tech stocks still made up the “top five” shares by market cap in the SPX, with AAPL, MSFT, AMZN, GOOGL, and TSLA composing a little more than 18% of the SPX market-cap combined. To some, that percentage may sound out of proportion until you consider that in mid-2021, the top five then included Meta (META), which made up 23% of SPX’s value. Here’s what that means. Big moves in mega-caps can have an outsized impact on SPX performance because it’s a market-cap-weighted index. But now, mega-caps outside of tech may begin to have more impact on SPX performance. Among the top 20 by market cap are Berkshire Hathaway Class B (BRK.B), United Health Group (UNH), ExxonMobil (XOM), Chevron (CVX), Procter & Gamble (PG), and Johnson & Johnson (JNJ). This means investors might want to watch the performance of “old economy” industries like insurance, health care, and energy for their effect on the overall market. It’s not just tech’s game any longer, something today’s chart (above) reflects as well.

Notable Calendar Items

Nov. 10: October Consumer Price Index (CPI) and expected earnings from Ralph Lauren (RL), AstraZeneca (AZN), and Dillard’s (DDS)

Nov. 11: Preliminary November University of Michigan Consumer Sentiment

Nov. 14: Expected earnings from Tyson Foods (TSN)

Nov. 15: October Producer Price Index (PPI), November Empire State Manufacturing, and expected earnings from Home Depot (HD) and Walmart (WMT)

Nov. 16: October Retail Sales and Industrial Production, and expected earnings from Lowe’s (LOW) and Target (TGT)

Nov. 17: October Housing Starts and Building Permits, November Philadelphia Fed Index, and expected earnings from Ali Baba (BABA), Kohl’s (KSS), and Macy’s (M)

Nov. 18: October Existing Home Sales and expected earnings from Foot Locker (FL) and JD.com (JD)

Nov. 21: Expected earnings from Dell (DELL) and Zoom Video (ZM)

Happy trading,

Shawn

Helpful Educational Content and Programming

  • Check out our upcoming Webcasts or watch any of our hundreds of archived videos, covering everything from market commentary to portfolio planning basics to trading strategies for active investors. You can also deepen your investing know-how with our free online immersive courses. No matter your experience level, there’s something for everybody.

  • Looking to stay on top of the markets? Check out the TD Ameritrade Network, live programming which brings you market news and helps you hone your trading knowledge. And for the day’s hottest happenings, delivered right to your inbox, you can now subscribe to the daily Market Minute newsletter here.

    TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc., are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of The Charles Schwab Corporation. TD Ameritrade Media Productions Company is not a financial advisor, registered investment advisor, broker-dealer, or futures commission merchant.

Print

Key Takeaways

  • Market Marches in Place as Investors Await Election Results
  • Volatility Ticks Higher Amid Election Uncertainty Ahead of Tomorrow’s Inflation Data
  • Disney’s Earnings Disappointment Could Hurt the Dow

Related Videos

Call Us
800-454-9272

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.  unaffiliated companies, and are not responsible for each other’s policies or services.  

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.



adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top