Markets started today before the bell in the red, waking up to the results of a mid-term rally that didn’t go as many expected. Normally, midterm elections after a new president takes office bring big wins on Capitol Hill for the party out of the White House.
But as we’ve said in countless contexts in this space over the past two years, these are not normal times. While the party outside the White House, the Republicans, may still control both the Senate and the House in the next Congress, they will do so by the slimmest of margins.
So while market participants may not like it, they finally got what they wanted: traffic jams. Passing bills requiring only basic majorities — 51 votes in the Senate, 220 in the House — is the only type that can be expected to pass, and those that do pass and target the president’s policies Biden will be greeted with the pen of veto, with no recourse to overrule him by a 2/3 vote. Anyone who has passed the constitutional review should be familiar with this process.
Either way, much of the gains made on post-Fed lows last week have disappeared in today’s trading: the Dow lost -646 points, -1.95%, the S&P fell -2.08%, the Nasdaq fell -2.48% and the Russell 2000 was -2.75% on the day. That brings the painful 2022 calendar totals so far to the following: the Dow -11%, the S&P -22%, the Russell -22.5% and the tech-heavy Nasdaq -35%. Thus, we are witnessing the worst trading year for the Nasdaq since 2008, when it fell more than -40%.
The FTX deal falls through. Is Crypto Following?
Speaking of a good chunk of the gains disappearing, crypto exchange Binance backed away from its plans to acquire rival FTX. Initially seeking to step in and take over FTX to resolve its insolvency issues, Binance CEO CZ Zhao has now washed his hands of the deal, citing agency investigations and possible mismanagement of the funds. Eccentric FTX CEO Sam Bankman-Fried went from over $15 billion to under $1 billion, for an astounding loss of 94% of his wealth in a single day.
Beyond the fortunes of wealthy crypto CEOs, the general questions that arise regarding the valuation of crypto entities – and the non-crypto companies that invest in them – seem to be kind, problematic. Particularly on the already beleaguered Nasdaq Index, where tech companies often have a history of holding crypto assets in diversified investment strategies, we can expect to see apprehension – and decisive corporate strategy coming out. of the investment class – in the future.
Shifting the focus a bit, and given the quality of the pandemic era and subsequent government liquid capital outflows for the crypto market, it’s possible we are witnessing another iceberg here that s crashes into the ocean. Depending on exposure to the asset class and the extent of that exposure, this could be one of those things that “breaks” significantly as the Fed plans to tighten interest rates for bring down measures of inflation.
Speaking of inflation measures, we turn to October from Thursday morning Consumer Price Index (CPI) report, where expectations are for the lowest headline read since February this year. Core printing is also expected to decline, albeit more slowly, to the 6% average. This is still more than 3 times the Fed’s optimal inflation level, but what analysts will be looking for are deeper than expected declines in these CPI sub-numbers. Any risk for warmer numbers would likely be ignored as a cycle anomaly.