By DAMIAN J. TROISE and STAN CHOE, AP Business Writers
NEW YORK (AP) — Election Day is up again for stocks as Wall Street braces for the day’s midterm election results and a big update on inflation later this week. . The S&P 500 rose 0.6% on Tuesday, its third straight gain. Trading was tentative during the day, with the Wall Street benchmark ranging from an even bigger gain to a modest loss during the afternoon. Analysts say investors appear to be betting on Republicans gaining control of at least one house of Congress, which could mean relatively little change for economic policies.
THIS IS A LAST MINUTE UPDATE. The previous AP story follows below.
NEW YORK (AP) — Election Day will bring another bullish boost to stocks on Tuesday as Wall Street braces for the day’s midterm election results and a big update on inflation to be released later. in the week.
The S&P 500 rose 1% and is headed for a third straight gain. But trading was hesitant during the day, with Wall Street’s benchmark ranging from an even bigger gain to a modest loss during the afternoon.
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The Dow Jones Industrial Average was up 465 points, or 1.4%, at 33,292 by 3:33 pm ET, and the Nasdaq Composite was up 0.9%.
With Americans heading to the polls across the country amid high inflation and concerns about a potential recession, analysts say investors appear to be betting on Republicans gaining control of at least one house of Congress. That, combined with a Democratic White House, could lead to little being done in Washington, which may be bad for society, but could also maintain the status quo in economic policy. And markets tend to abhor uncertainty.
If Republicans end up winning control of at least the House of Representatives, the reaction in financial markets could be modest, according to economists at Goldman Sachs. Stocks have already risen in anticipation, with two straight days of gains of at least 1% before Election Day. But a surprise victory by Democrats could upset the market if it leads investors to expect higher corporate taxes and other policy changes.
A Republican victory could also present its own risks that manifest over time. For one thing, it could mean that any aid to the economy from Congress in the event of a potential recession would be less likely to pass and weaker than it would be under a Democratic-controlled Congress.
Economists are considering what might happen in a recession because something much more shocking than politics is dominating the economy as well as the markets: high inflation and the rapid interest rate increases the Federal Reserve is pushing to rein in them.
That’s why the more important milestone for markets this week than Election Day may be Thursday’s upcoming inflation report. That data, which economists expect will show a fourth straight month of slowing earnings since the summer peak, will likely have far more influence on what the Fed does with rates.
“It will continue to be front and center until we are out of the woods from this high-inflation environment,” said Bill Merz, head of capital markets research at US Bank Wealth Management. “The Fed doesn’t even know how far they need to go, certainly no one else does.”
By raising rates, the Federal Reserve is intentionally slowing down the economy by making it more expensive to borrow money. That, in turn, should reduce inflation, which is near its highest rate in four decades. The problem for markets is that high rates drive down the prices of stocks and other investments, while increasing the risk of a recession if rates go too far.
Although the Fed has said it may soon scale back the size of its hikes, it continues to warn markets that it may ultimately raise rates more than expected given how stubbornly high inflation has been. The Fed has already raised its key overnight rate to a range of 3.75% to 4%, up from virtually zero in March, and more investors expect it to top 5% next year.
A softer-than-expected reading on Thursday could give the Fed some wiggle room to relax a bit after raising interest rates at a breakneck pace this year. But a worse-than-expected reading could have the opposite effect. The Fed has already said it would rather raise interest rates too high rather than leave them too low because a recession is a less bad outcome than severely high and long-lasting inflation.
“However, the point is how long it takes to get back to a more normal rate of inflation and the longer it takes, the more restrictive the Fed is forced to be,” Merz said.
Stocks are also moving on corporate earnings reports as the tail end of earnings season comes to a close. Take-Two Interactive sank 12.6% after reporting weaker-than-expected results for the latest quarter.
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