There are two big hurdles for markets in the week ahead – another potentially hot consumer inflation report and the Congressional midterm elections. Stocks were higher Friday but closed out a rough week with losses, after tough talk on interest rates from Federal Reserve Chairman Jerome Powell Wednesday. Powell suggested the central bank may have to raise rates even more than it expected in order to squash inflation, so that makes Thursday’s report of the October consumer price index even more critical. At stake in Tuesday’s election is control of Congress and that could decide how money is spent and how much is spent on different programs. “The most important thing for the market to know is that the election is over,” said Ed Mills, policy analyst at Raymond James. “100% of the time, the S & P 500 has been up 12 months after the midterm election.” The House is currently controlled by Democrats, and Democrats have a majority when considering the tie breaking vote of Vice President Kamala Harris in the Senate. “We anticipate the most likely outcome is a Republican House of Representatives,” said Mills. “The Senate is close. I think the Republicans have the edge right now, but I don’t think we really know.” Midterm rallies Stocks tend to gain in the final months of midterm election years, and strategists have been expecting the market to move higher. The jump in interest rates has been putting a chokehold on growth and tech stocks. The 2-year Treasury yield has been racing higher and briefly touched a 15-year high of 4.8%, following Friday’s stronger than expected October jobs report. The S & P 500 rose 1.4% Friday but ended the week at 3,770 with a 3.4% loss. The Nasdaq fell 5.7% for the week but gained 1.3% Friday. “There will absolutely be a relief rally if results are clear,” said Julian Emanuel, head of equity, derivative and quantitative strategy at Evercore ISI. Emanuel said rumors that China will lift Covid restrictions were helping stocks and sending commodities higher Friday, and that could also be a catalyst in the week ahead if there is actual news that confirms the speculation. “If the results [of the election] are not clear but not heavily disputed, the positive news potentially coming out of China will be sufficent to help that post midterm rally,” he said. “The market sentiment is quite overwhelming in our view such that there’s likely to be a bigger rally if Republicans do win.” CFRA Chief Market Strategist Sam Stovall said even when interest rates are climbing, the midterm election has been a catalyst for stocks. He examined market performance in other midterm election years when interest rates were going up. “The market was up an average 12.8% 12 months later,” said Stovall. The years where that occurred were 1946, 1958, 1994 and 2018. “Even a rising rate environment has not derailed the impact of the post midterm optimism,” he said. According to CFRA, sectors that perform best from Nov. 1 of a midterm election year to the following Nov. 1 include semiconductor eqipment, up an average 48.2% in that period since 1990. Footwear also does well, up about 42%, as is electronic equipment and instruments. In those years, the S & P has added an average 16% in that period, while the Nasdaq has gained 32.6%. Besides the election, the corporate earnings season continues. Reports are expected from dozens of companies, including Walt Disney, AstraZeneca, Dupont, Wendy’s and Occidental Petroleum. Hot inflation? The CPI is by far the most important economic report expected in the coming week, and economists expect consumer inflation rose at an annual pace of 7.9% in October. When excluding food and energy, core CPI is expected to rise at a 6.5% rate, according to Dow Jones. In September, headline CPI was up 8.2%. “If it comes in below 8% that would be a psychological positive,” said Stovall. Friday’s October employment report was stronger-than-expected with 261,000 jobs added in October, while economists expected 205,000. The strong labor market is seen as a source of inflation by the Fed and so far its rate hikes are not slowing job growth that much. If inflation data were to surprise to the downside, it would be counter to recent trends and be a potential positive catalyst for the market. Week ahead calendar Monday Earnings: Palantir Technologies , Viatris, Activision Blizzard, Lyft, Take-Two Interactive, TripAdvisor, Brighthouse Financial, Brookdale Senior Living , Mosaic, Cabot, International Flavors and Fragrances, Choice Hotels, BioNTech, NRG Energy 3:00 p.m. Consumer credit 3:40 p.m. Cleveland Fed President Loretta Mester, Boston Fed President Susan Collins 6:00 p.m. Richmond Fed President Tom Barkin Tuesday Election Day Earnings: Walt Disney , Dupont , Bayer, PerkinElmer, Elanco Animal Health, Coty, Planet Fitness, Reynolds Consumer Products, Norwegian Cruise Line, Hain Celestia l, Party City, , Akamai, Lucid Group, Affirm Holdings, Axon, Sprouts Farmers Market, 3D Systems, Angi, Occidental Petroleum, AMC Entertainment, NortonLifeLock, Ambac Financial, Allbirds 6:00 a.m. NFIB small business survey Wednesday Earnings : D.R. Horton, Wendy’s, Hilton Grand Vacations, Honda Motor, Beyond Meat, Adidas, Performance Food Group, Capri Holdings, SeaWorld, Hanesbrand, Canopy Growth, Fossil, Rackspace, Redfin, Bumble, Coupang, Unity Software, Kinross Gold, Rivian Automotive, Trade Desk, Jamf Holding , Rocket Lab 3:00 a.m. New York Fed President John Williams in Zurich 10:00 a.m. Wholesale trade 11:00 a.m. Richmond Fed Presiden Tom Barkin Thursday Earnings : AstraZeneca , Becton Dickinson, Edgewell Personal Care, Tapestry, Warby Parker, Ralph Lauren, ArcelorMittal, WeWork, Sally Beauty, Yeti, Toast, Beazer Homes, Aurora Cannabis, Poshmark, Toast 2:00 a.m. Fed Governor Christopher Waller in Australia 8:30 a.m. Initial jobless claims 8:30 a.m. CPI 9:00 a.m. Philadelphia Fed President Patrick Harker 9:35 a.m. Dallas Fed President Lorie Logan 12:30 p.m. Cleveland Fed Presdent Loretta Mester 1:30 p.m. Kansas City Fed President Esther George 2:00 p.m. Federal budget 6:35 p.m. New York Fed President John Williams Friday Veterans Day Earnings: SoftBank, Embraer Bond market closed 10:00 a.m. Consumer sentiment
