THE TICKER

President Trump broke his habit of only acknowledging stock market highs on Twitter to offer a theory about the recent sell-off: 

He’s right about at least this much: It has been a rough stretch for investors. Stocks ended up surging Tuesday, with the S&P 500 climbing 1.6 percent. But the index is on pace to record its worst month since it was in the thick of the financial crisis in February 2009. 

Uncertainty surrounding the competitive midterm elections on Tuesday appears to be among the least of investors’ worries. Trump probably has been closer to the mark when he’s blamed the falling market on rising interest rates (a development he has used to savage his handpicked Federal Reserve chairman). But market watchers point to a confluence of other factors, including fiscal stimulus that is wearing off, fears that companies are overvalued and a sense the economic expansion is running out of steam. The rising threat of a disruptive trade war with China is only exacerbating investors' jitters.

Would a new division of power in Washington that hands Democrats some control on Capitol Hill further weaken stocks, as Trump predicts? History suggests an answer: No. 

Since 1950, the S&P 500 has averaged its best annual returns — of 18.3 percent — when a Democratic president shared power with an all-GOP Congress. That’s obviously not a possibility next year.

But the current makeup in Washington, with Republicans in control of both ends of Pennsylvania Avenue, has marked the second-worst performance by the S&P 500 since the 1950's, with average annual gains of 11 percent. The stock market has only fared worse under a Republican president facing an all-Democratic Congress; and it has done nearly twice as well when a Republican president confronted split control on the Hill, as this chart from LPL Financial illustrates:

A longer lens gives all-Republican control a more pronounced advantage, per this chart from Strategas that reaches back to 1933:

Regardless of the balance of power in Washington, though, the market tends to register its strongest performance of any point during a four-year presidential term in the quarters immediately following the midterms. This chart from LPL Financial, pulling in data back to 1896, shows that pattern:

And going back to the Truman administration, the S&P 500 has averaged a 14.5 percent gain in the years following midterms — and finished in positive territory in each of those 18 years: 

It’s far from clear there’s a causal relationship between the balance of power in Washington and the market’s performance. Courtney Rosenberger, a director of policy research at Strategas, points to the fact that midterms usually benefit the party out of power, yielding more gridlock. And gridlock, she said, can be a bullish force for the market because it allows investors to focus on fundamentals. 

But Brian Belski, chief investment strategist for BMO Capital Markets, sounded a skeptical note about that thinking in a research note last week. “When examining key macro indicators and market performance during the first and last two years of presidential terms, gridlock does not necessarily coincide with strong results. In fact, annual S&P 500 price returns during political gridlock in the last two years of presidential terms were nearly 50% less than returns during full party control,” he wrote. “In addition, GDP growth, rate of inflation, personal income, and unemployment were all worse off under gridlock compared to full party control.”

Looking ahead, Goldman Sachs’s economic team doesn’t see the midterms playing a major role shaping economic growth one way or the other. “Continued Republican control of the House and Senate would b slightly more growth-friendly in the near-term than divided government or Democratic control, we believe, as somewhat greater tax-based stimulus under a Republican Congress would more than offset slightly greater spending growth under a divided or Democratic Congress,” the team wrote in a research note earlier this month. “However, under any of the scenarios, the boost to growth from recent tax cuts and spending increases should fade by 2020.”

Goldman economists predict the makeup of Congress won’t have much influence over the direction of the administration’s trade policy or deregulatory efforts, and an infrastructure package faces long odds no matter what. But they point to one potential wrinkle if Democrats reclaim some Hill control: The next deadlines for funding the government and lifting the debt ceiling, arriving sometime next fall, could become more contentious. That would rattle markets, at a minimum. 

In the meantime, Trump’s Monday tweet suggests he wouldn’t hesitate to pin blame for future stock market sell-offs on empowered congressional Democrats. Here, via Bloomberg, is a look back at Trump’s tweets about stock market milestones: 

MARKET MOVERS

— Tech stocks still struggle. Bloomberg News's Luke Kawa: “Tech wreckage keeps piling up. The once high-flying stocks that propelled the S&P 500 Index to records have been leading the way down amid signs of hedge fund flight. Equity market fear has become more focused in technology stocks, according to options markets. . . . ‘Unlike industrials or materials stocks, there isn’t any clear ‘valuation floor’ for tech,’ said Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo. ‘It’s a function of how much you’re willing to pay up for growth.’ . . . ‘We saw for over two years how the market bowed at the altar of Amazon, Apple, Alphabet, Microsoft, and Facebook,’ said Dave Roberts, a Washington-based independent trader of volatility options and products. ‘Breadth was weak, signs of deterioration showed up almost everywhere, yet it was all covered up by five stocks. Now, they’re broken.’”

Zooming in on Amazon's skid. Bloomberg News's Spencer Soper: “Fears of a prolonged market downturn, slowing international sales, stepped-up competition in the U.S. and flat-out confusion about how Amazon.com Inc. makes money are all reasons behind the company’s dizzying 25 percent drop in value from its September high. . . . Amazon last week forecast revenue of as much as $72.5 billion in the current quarter, falling short of analysts’ average estimate of $73.8 billion. The outlook and third-quarter results, which showed slowing sales growth in all major revenue categories including international and cloud computing, prompted investors to question whether the company is reaching a saturation point. The reasons for worry continued this week. The U.K. proposed a first of its kind digital services tax, spreading fear that governments could increasingly turn to big tech platforms for revenue.” (Amazon.com founder and chief executive Jeffrey P. Bezos owns The Washington Post.)

— Businesses hike prices. The Wall Street Journal's Austen Hufford and Annie Gasparro: “U.S. companies are raising prices on everything from plane tickets to paint, passing on higher costs for fuel, metal and food to their customers after years of low inflation. Coca-Cola Co. and Arconic Inc. on Tuesday said they raised prices in the third quarter. Top airlines, manufacturers and food makers have also announced price hikes over the past week.

“The higher prices have effectively ended a long period of low inflation that led the Federal Reserve to keep short-term interest rates near zero for years. ... Sensing that consumers are getting used to higher prices, some companies are also charging more to improve profits... At some point, higher prices could dampen the economy’s recent strength. Investors are concerned that higher inflation could prompt the Fed to raise interest rates more quickly to prevent the economy from overheating.”

As consumer confidence rises. Reuters's Lucia Mutikani: “U.S. consumer confidence rose to an 18-year high in October, driven largely by a robust labor market, bolstering expectations that strong economic growth would continue through early 2019. But a weakening housing market and tightening financial market conditions are casting a shadow on the economic expansion that is in its ninth year, the second longest on record. Home price gains slowed further in August, other data showed, another sign that higher mortgage rates were weighing on housing demand.”

Wonkblog
Total borrowing for 2018 is projected to be more than double the amount last year.
Christopher Ingraham
The United States is taking on too much debt right now, a problem that is will only worsen moving forward, former Federal Reserve Chair Janet Yellen said Tuesday.
CNBC
TRUMP TRACKER

TRADE FLY-AROUND:

— China could weaponize its currency. The New York Times's Keith Bradsher: “As the United States and China swap threats and mete out increasingly punishing tariffs, the world is watching to see whether Beijing turns to one of its most potent economic weapons. It involves the number 7 . . . There is nothing particularly threatening about the number 7 itself. The renminbi at 7.002 to the dollar is pretty similar to the currency at 6.998 to the dollar. But passing that number would be significant symbolically. It would suggest China is prepared to let its currency weaken further still. That would give China’s factory owners an advantage when they sell their goods in the United States . . . 

"A weaker currency can also help Chinese exporters beat [Trump’s] tariffs. Right now, the United States imposes tariffs of about 10 percent on a wide variety of Chinese goods that arrive at an American port. If the renminbi has fallen 10 percent, the tariff is basically nullified.”

U.S. charges Chinese spies. The Post's Ellen Nakashima: "The Justice Department on Tuesday unsealed charges against 10 Chinese spies, hackers and others accused of conspiring to steal sensitive commercial airline and other secrets from U.S. and European companies. The indictment marks the third time since September that the United States has brought charges against Chinese intelligence officers and their recruits for stealing American intellectual property... The alleged conspiracy ran for at least five years beginning in 2010, and focused on the theft of technology underlying a turbofan engine used in U.S. and European commercial jets, officials said."

Chinese factory growth slumps. Reuters: "China’s manufacturing sector in October expanded at its weakest pace in over two years, hurt by slowing domestic and external demand, in a sign of deepening cracks in the economy from an intensifying trade war with the United States... The latest reading suggests a further loss of momentum in the world’s second-biggest economy, and the deteriorating environment for businesses could prompt more policy support from Beijing on top of a raft of recent initiatives."

China’s Commerce Ministry on Tuesday urged the United States to “stop its wrong actions” after U.S. President Donald Trump’s administration took action to cut off a Chinese state-backed chipmaker from U.S. suppliers.
Reuters
A trade deal among 11 Pacific nations, once envisioned as a check on China’s clout but abandoned by Trump, will kick in on Dec. 30, Japan’s Economy Minister Toshimitsu Motegi said Wednesday.
Bloomberg

MELTDOWN WATCH:

POCKET CHANGE

Dimon: Skipping Saudi conference achieved nothing. Bloomberg: "Jamie Dimon was among the first banking executives to drop out of this month’s investment conference in Saudi Arabia, but he doesn’t think it made a difference. The moves from business leaders to shun the event accomplished 'nothing' and were largely symbolic, Dimon, the chief executive officer of JPMorgan Chase & Co., said Tuesday at an event hosted by Axios in Los Angeles.  'We couldn’t be seen to be in any way condoning that behavior,' Dimon said. Still, business relationships with the nation will continue, he said. Dimon said his bank, which has been in the country for more than 70 years, will follow the lead of the U.S. government when making decisions about how to interact with Saudi Arabia after the alleged murder of Jamal Khashoggi, a Washington Post columnist and prominent government critic."

— Hedge funds test clients. WSJ's Juliet Chung: “Some of the rare hedge funds earning their keep are about to make it harder on investors. Israel Englander’s $35.9 billion Millennium Management and Kenneth Griffin’s $31 billion Citadel LLC are rolling out changes that could result in investors facing a longer path to get their money out of a fund or having to pay higher fees. Millennium has told investors that early next year they will get back their profits.

"To reinvest that cash with Millennium, the clients will need to sign up for a new share class whose terms mean it would take five years to get all their money back — compared with a year now. Citadel is tweaking how the firm charges investors in several of its hedge funds. The changes are nuanced, but can result in scenarios where investors pay more. These two firms are among the exclusive group of hedge funds that have posted a steady stream of profits even as the industry continues an extended drought.”

— Auto sales hit a skid. Bloomberg: "U.S. auto sales may slip into negative territory for the year, as plunging demand for passenger cars and costlier loans wipe out a stronger-than-expected start to 2018... A market that was cruising in the first half of the year on strong demand for sport utility vehicles including Fiat Chrysler’s Jeep Cherokee has succumbed to interest-rate hikes, making it more expensive for consumers to finance new-car purchases."

    As used cars stage a comeback. Bloomberg News's Craig Trudell: “AutoNation Inc. said Tuesday that it’s investing $50 million in Vroom Inc., an online buyer and seller of used cars that offers no-haggle pricing and home delivery. AutoNation disclosed the deal along with the news of its steepest drop in quarterly new-vehicle sales in nine years, which sent shares sliding. ‘You have a consumer that’s basically had free money for eight years,’ Mike Jackson, AutoNation’s CEO, said in a phone interview. ‘There’s a cost related to financing that they have to adjust to.'”

    Business
    A multimillion dollar offer to grow marijuana is tearing the "world pumpkin capital" apart.
    Mia Torres, Damian Paletta and Ricky Carioti
    MONEY ON THE HILL

    Struggling areas won't figure in midterms. NYT's Jim Tankersley and Ben Casselman: "The competitive districts that will decide control of the House are richer and more economically vibrant than the country as a whole. But there is little evidence that the thriving economies in those districts are buoying Republican candidates enough to guarantee victories against well-funded Democratic challengers. The concentration of battlegrounds in prosperous areas could have important policy implications for the next Congress, with swing-district representatives more concerned with preserving their region’s own good fortunes than with helping large parts of the country that continue to lag economically."

    Trump slams Cordray, Warren. By way of endorsing Ohio gubernatorial candidate Mike DeWine, the president fit two criticims of the founding forces behind the Consumer Financial Protection Bureau into one tweet this morning: 

    — Luetkemeyer poised to rise on Financial Services. Reuters's Pete Schroeder and Michelle Price: “Next week's U.S. elections could see Wall Street's favorite congressman assume one of the most coveted roles setting financial policy on Capitol Hill - if Republicans retain control of the House of Representatives…Republican Blaine Luetkemeyer, a key banking industry ally, is the front-runner to lead the panel.

    “A congressman since 2009 but relatively unknown at a national level, Luetkemeyer has emerged as a favorite of bankers who have found him responsive to complaints that overzealous regulation is hurting the economy. Commercial banks have donated more than $300,000 to Luetkemeyer's re-election campaign this year, making him the top recipient of bank cash in Congress, according to data from the Center for Responsive Politics.”

    Land O'Lakes, Purina drop support for Steve King.  Bloomberg's Deena Shanker and Lydia Mulvany: "Dairy giant Land O’Lakes announced on Tuesday that it will no longer make financial contributions to Representative Steve King of Iowa after a gun-fueled massacre at a Pittsburgh synagogue brought new attention to the Republican’s incendiary comments about race and association with white nationalism. Purina PetCare made a similar announcement Tuesday afternoon. The murder of 11 people, many elderly, in the mass shooting this weekend resulted in the arrest of a man who allegedly made anti-Semitic and anti-immigrant rants online. King has been at the forefront of a right-wing push to end birthright citizenship, a policy [Trump] said in an interview with Axios he would seek to enact, despite protections under the U.S. Constitution."

    THE REGULATORS

    DOJ, SEC probe GE. The Post's Taylor Telford: "Embattled industrial giant General Electric said Tuesday that federal regulators are looking into its accounting practices regarding a $22 billion write-down from the company’s power business. The disclosure came the same day the company released its third-quarter earnings report under new chief executive Larry Culp, formerly of Danaher Corp.

    "The $22 billion charge highlights the failings of GE’s investments in its power unit. When the charge was announced Oct. 1, along with the news of Culp’s appointment, the company said it would miss earnings expectations for 2018. During a conference call with investors Tuesday, Chief Financial Officer Jamie S. Miller said that the charge, tied to acquisitions in GE’s power businesses, had prompted the Securities and Exchange Commission to expand its investigation. The Justice Department is also looking into the charges."

    DAYBOOK

    Today

    Coming soon

    • Federal Reserve Vice Chairman for Supervision Randal Quarles delivers  a speech on financial regulation at the Brookings Institution on Nov. 9 in Washington.
    • The National Economists Club holds an event titled “US Outlook: Exploring the Key Debates” on Nov. 15 in Washington.
    THE FUNNIES

    — A New Yorker cartoon by Jason Chatfield:

    View this post on Instagram

    A cartoon by @jasonchatfield. #TNYcartoons

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    BULL SESSION

    Whitey Bulger: Murderer, robber, racketeer.

    “I can’t turn back”: Migrant children trek through southern Mexico.

    Late-night reactions to Trump’s interview on birthright citizenship: