Wall Street is confident the midterm election will lead to gridlock in Washington, but traders say this week’s inflation report may prove to be far more consequential to markets.
Markets have rallied in recent days as investors bet Republicans will take control of at least one chamber of commerce, leading to divided government. Traders typically believe gridlock is good – because it means one party can’t push through legislation that messes things up.
In this case, that means Republicans can’t enact unfunded tax cuts and Democrats can’t push through unfunded spending programs, both of which would worsen inflation and lift interest rates.
“Less government, complete gridlock, will probably benefit the stock market,” Peter Tuchman, a veteran New York Stock Exchange floor trader, told CNN on Tuesday.
If Republicans win control of at least the House of Representatives, markets may have a “muted” reaction because that is widely expected, Goldman Sachs told clients in a report Monday.
Andrew Frankel, co-president of Stuart Frankel, warned that a surprisingly strong night for Democrats that allows them to retain control of both the House and Senate would cause a “meaningful move lower” for stocks.
Multiple NYSE traders told CNN that the midterm election may be overshadowed by Thursday’s consumer price index, an inflation gauge that has become arguably the most important economic metric of the month.