Split Congress Is Greenlight For Stocks

November 8, 5:00 pm EST

The midterm elections are behind us, and I’ve suspected that the lift of that cloud of uncertainty would be the greenlight for stocks to make a run into the end of the year.

We’re seeing it start today.

Remember, the big work on economic stimulus has been done, and that will continue to drive the best growth we’ve had since 2006.

Add to that, there is the potential that Trump can get infrastructure done with a split Congress.  With that, it would be a matter of how hot the economy will get.

But as I said, there’s probably a better chance that the Democrats will block any more progress on the economic front, to best position themselves for a run at the 2020 Presidential election.

Interestingly, this gridlock scenario could actually be the optimal scenario for stocks here.

The notion that the economy might be on the verge of accelerating too fast/ running too hot, has dialed UP the inflation-risk-premium for the stock and bond markets.  The hot trajectory for the economy has kept pressure on the Fed to continue the path higher in interest rates.

Thus far, the seven quarter-point hikes the Fed has made to the benchmark overnight lending bank rate has NOT choked off economic momentum. But it has, finally, started to get market rates moving.  The ten-year government bond yield is near 3.25%, the highest in seven years. And stocks haven’t liked this 3%+ level on rates.  And that has a lot to do with what it does to consumer rates, specifically mortgages.

As you can see in the chart below, we now have 30-year mortgages running north of 5% for the first time since 2010.

This move in rates has slowed down the housing market. And this is an example of how this path of hotter growth and an aggressively normalizing Fed has been tracking toward growth killing interest rate levels.

Perhaps some gridlock in Washington will slow the speed at which both are adjusting and allow for some time for the economy to sustain at this 3% growth level.

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