To The Moon

The red wave that the Republicans have expected before the midterm election has not materialised, and both parties (Republicans and Democrats) are still locked in a tight tug-of-war.

A divided government will be welcomed by the market, not least because major legislations imposing restrictive regulations for the US economy and selective sectors may encounter challenges and delays in being passed.

In fact, historical market data has revealed that the best outcome for the stock market is a Democratic President and a Republican-controlled Congress, when S&P 500 index witnessed on average an annual return of 16.2%, compared with 13.6% with a split Congress and 10.1% with a Democrat-controlled Congress.

I expect this midterm election to produce a split Congress with the Republicans eventually emerging victorious in the House, while the Democrats maintain a slim majority in the Senate. Not the best outcome for the market, though not the worst either.

Nevertheless, I believe that the market will be returning its attention to the latest all-important inflation data due to be released this week, as investors comb through the data and look for signs of cooling costs from food and clothing to energy and housing.

However, even if inflation may have peaked and show signals of softening, its level is going to still be far from the ultimate long-term goal of 2% that would put the Fed at ease. Hence, I would expect the Fed to maintain its hawkish stance on interest rate hiking to rein in the stubbornly high inflation at least till the middle of next year.

Wall Street has been hoping for and pricing in some moderation of the pace of rate hike to 50 basis points in the next FOMC meeting in December.

However, if the latest inflation print turns out to be hotter than expected, investors have better brace themselves for another aggressive rate hike of 75 basis points in the coming FOMC meeting, as the Fed has reiterated its determination to bring inflation under controls at all costs, even if that will bring hardship to the economy.

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