Why Smart Money Ignored the U.S. Midterm Elections

The 5.4% rise added yesterday, making it one of the most bullish days in stock market history.

S&P 500 Index Daily Chart

Although I expected to start moderating, I did not expect the market to react in such an outsized manner to what was a fairly modest change in inflation. But trend is everything and Thursday morning’s inflation reading suggests that our inflationary fever is finally breaking.

Excluding Wednesday’s -2% post-election hangover, we’re “only” up 3.4% from Tuesday’s close, which is still a lot, but a bit more reasonable. . And more importantly, Thursday’s gains put the 4,000 rally back on track. (And at this rate, we could be there this morning.)

Even though the bears tried to punish stocks for Republican underperformance in the midterm elections, this market doesn’t care about politics.

The stock market isn’t really concerned with politics this time around because it knows the Fed is the one controlling the economy. By Wednesday afternoon, expect the election to be old news for the market and it will be back to how it was before, which is obsessed with inflation and rate hikes.

If market attention returns to where it was before the election took over the airwaves, that means the October bounce is back and 4k is within reach.

Well, it turns out my Wednesday afternoon forecast was a little premature, but I hope most readers can forgive me for being off by a few hours.

As expected, the only thing that matters for this market is inflation and rate hikes and yesterday morning’s weaker than expected inflation reading means the Fed doesn’t need to move as aggressively with future rate hikes.

Sometimes it’s better to be lucky than good and Thursday was one of those days. I was fairly certain that Wednesday’s election-fueled selloff would quickly fade. What I didn’t expect were Thursday’s historic gains after a “less bad than expected” inflation report, but sometimes that’s the way the game goes. The important thing is to recognize the direction the wind was blowing because you can’t be lucky if you don’t know which side of the street to be on.

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