Wall Street's Rally Continues on Election Day

Election Day brought another rise for Wall Street, with stocks climbing Tuesday for a third straight day. The S&P 500 rose 21.31 points, or 0.6%, to 3,828.11, though it flipped between an even bigger gain and a modest loss to get there. The Dow Jones Industrial Average climbed 333.83 points, or 1%, to 33,160.83, and the Nasdaq composite gained 51.68, or 0.5%, to 10,616.20. Analysts say investors appear to be making bets for Republicans to gain control of at least one house of Congress, which could mean relatively little change for economic policies. That combined with a Democratic White House could lead to little getting done in Washington, which may be bad for society but could also keep the status quo on economic policy, the AP reports. And markets tend to abhor uncertainty.

If Republicans do 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 rallied in anticipation of it, with two straight days of gains of at least 1% before Election Day. But a surprise win by Democrats could upset the market if it leads investors to expect higher corporate taxes and other policy changes. A Republican win could also introduce its own risks that show themselves over time. For one, it could mean any help for the economy from Congress in the event of a possible recession would be less likely to pass and weaker than it would otherwise be under a Congress controlled by Democrats.

Economists are gaming out what could happen in a recession because something much more impactful than politics is dominating the economy, as well as markets: high inflation and the swift interest-rate hikes the Federal Reserve is pushing through to get it under control. That’s why the more important milestone for markets this week than Election Day may be Thursday’s upcoming report on inflation. That data, which economists expect to show a fourth straight month of slowing gains from the summer's peak, will likely carry much more influence over what the Fed does with rates.

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