Why Wall Street Loves Gridlock in Washington

Divided we rise?

It’s become a favorite data point among sell-side Wall Street historians: In the year after every midterm election since 1950, the S&P 500 has gone up, regardless of the party in power.

“It’s no exaggeration to say that midterm elections are one of the best historic buy signals for equities we have,” Jim Reid, a markets strategist at Deutsche Bank, wrote in a client note this morning.

Even better: Stocks tend to outperform when there’s a divided government. According to LPL Financial, since 1950, the S&P 500 has outperformed (on a 52-week basis) whenever voters produce the power scenario of a split or Republican-controlled Congress and a Democratic president. (The benchmark S&P has climbed 17.5 percent in those years versus an overall average annual return of 12.3 percent.) That combination is looking more likely this morning, with the polls suggesting that the Republicans will most likely take control of the House, while the Senate is a tossup.

As always, past performance is no indicator for future gains (or losses). Still, it’s worth examining how politics and investor psychology have tended to influence the markets after midterm elections over the past eight decades.

There are two central reasons markets rally after the midterms. First, say the LPL markets strategists Barry Gilbert and Jeffrey Buchbinder, “uncertainty associated with the election is behind us, and markets don’t like uncertainty.” More crucially, investors view the midterms as “something of a course correction from presidential elections.” If the opposing party gains ground, it’s more likely businesses and investors will see greater “prospects of a better policy balance ahead, regardless of who is in the Oval Office.”

One result: ambitious tax and government spending increases would be off the table, a scenario that could buoy corporate profits, according to Brian Gardner, the chief Washington policy strategist at Stifel, an investment bank and wealth management firm. A potential drawback? It could open the door to a debt-ceiling standoff, higher odds of a government shutdown and partisan paralysis when it comes to trying to get stuff done — i.e., a fiscal spending plan to lift the country out of a looming recession.

The way-too-early winners and losers view: The energy and defense sectors would do well, Gardner says. Big Pharma could also benefit, if Republicans succeed in rolling back Medicare’s ability to negotiate on prescription drug prices, a key pillar of the Inflation Reduction Act. A potential loser is Big Tech, which has critics in both parties.

HERE’S WHAT’S HAPPENING

Donald Trump drops a hint about 2024. The former president stole the spotlight at a rally in Ohio, telling supporters in a speech for J.D. Vance, the Republican Senate candidate, that he would make “a very big announcement on Nov. 15 at Mar-a-Lago.” The comments fueled speculation that he was gearing up for another White House run.

FTT, the digital coin tied to the leading crypto exchange FTX, plunges. The token has lost nearly a quarter of its value in the past day. It is also raising fears about more instability in crypto land, causing drops in Bitcoin, Ether and Solana. Alameda Research, the hedge fund operated by the crypto mogul Sam Bankman-Fried, has big holdings in FTT and Solana.

Nvidia starts selling a China-only chip. The U.S. chip-maker is reportedly selling an alternative to a high-end chip banned from sale in China under new American export restrictions. Meanwhile, Apple’s warning that it would not be able to produce enough iPhones for the holiday season because of Covid-19 lockdowns in China highlights how enmeshed the tech giant is there, even as many of its Western peers are shut out.

The owners of Liverpool F.C. put the soccer club up for sale. Goldman Sachs and Morgan Stanley have been hired to sell the franchise, one of the most popular worldwide. The club could sell for far more than the $3 billion that Chelsea fetched this year; Forbes values Liverpool at nearly $4.5 billion.

Elizabeth Holmes is denied a new trial. A federal judge that the Theranos founder’s arguments for a new one didn’t introduce any new evidence. Holmes is set to be sentenced on Nov. 18 on four counts of criminal fraud.

Money matters dominate COP

One of the big questions to emerge so far from COP27: Who is paying for efforts to combat global warming, and is it fair? Here’s what’s happening at the gathering in Sharm el Sheikh, Egypt:

• The Switzerland plan — pay poorer countries to reduce their carbon emissions, then claim credits toward its own carbon footprint — is drawing scrutiny.

• Egypt may be hosting a conference dedicated to reducing carbon emissions, but it’s eager to sell fossil fuels to Europe to raise money for its debt-ridden economy.

• Climate activists are protesting Coke’s sponsorship of COP27, pointing to its increasing use of plastics.

• A new study by Oxfam said that the world’s 125 wealthiest individuals collectively produce 393 million tons in annual carbon emissions — or 3 million tons each on average.

Musk, and the power of one

Is Elon Musk’s frenetic management style, which is often punctuated by a daily tweet barrage (including a now-deleted one engaging with a quote from a white nationalist), a sign of genius, or an indication that he’s in over his head? Yesterday, the prominent venture capitalist Chris Sacca, an early Twitter investor, spoke on the matter.

“One of the biggest risks of wealth/power is no longer having anyone around you who can push back, give candid feedback, suggest alternatives, or just simply let you know you’re wrong,” he wrote.

Musk’s management of Twitter has been chaotic. He pushed for a huge round of layoffs, only to ask some of those workers to return. He delayed the rollout of Twitter’s subscription product amid internal pushback. Advertisers have paused their spending. While Musk says Twitter usage is at a record high, others point to potentially troubling data. And just yesterday, he publicly urged independent voters to back Republican candidates in today’s midterm elections.

Others are seizing on the moment: The news publisher Axios has promoted its newsletters to potential advertisers as a “well-lit alternative to Twitter,” according to an email to ad buyers obtained by DealBook.

Many of his supporters remain in his corner. The investor Ron Baron, an early Tesla investor, told CNBC that the opportunities at Twitter were “gigantic.” Meanwhile, Musk allies in charge at Twitter include his personal lawyer and a crowd nicknamed “Elon’s goons.” Sacca was unimpressed: “I’ve recently watched those around him become increasingly sycophantic and opportunistic.”

Sacca sees a corollary in Travis Kalanick, Uber’s co-founder. In 2017, Kalanick resigned from the ride-hailing company after shareholders revolted over a toxic workplace culture. Other tech founders have been similarly humbled: Musk was fired from PayPal in 2000.

To be clear, Sacca isn’t calling for Musk to leave Twitter. “I really want this thing to work,” he tweeted. “The only way I see that happening is if anyone around Elon can speak some truth to power and complement his bold and ambitious instincts with desperately needed nuance.”

In fashion, green clashes with antitrust

Fashion brands are under pressure to go green. But an effort by some big houses to collaborate on sustainability initiatives has put them in the cross hairs of antitrust authorities, with European regulators claiming that some attempts may have resembled collusion, write The Times’s Lizzie Paton and Jenny Gross, and DealBook’s Ephrat Livni.

The coronavirus pandemic inspired fashion to rethink its practices. During lockdowns, a group of clothing executives and designers spoke on Zoom about limiting waste, and went on to publish ambitious statements in 2020 on making the industry more environmentally friendly. But those declarations set off alarm bells in Brussels: E.U. antitrust regulators raided unnamed fashion houses in May, stating that the targets may have violated rules against price fixing and created a cartel. (People at several of the companies confirmed they had been contacted. The brands declined to comment, and the E.U. has not publicly identified them.)

Many sustainability policies would end up raising prices and reducing quantity, said Hill Wellford, a former antitrust official at the Justice Department now at the law firm Vinson & Elkins. “Multiple client consortiums have called me about making agreements for environmental purposes,” he said, “and I have to say to them, ‘Those are dangerous to do.’”

The clash between sustainability and competition policy is hot political fodder. “Congress will increasingly use its oversight powers to scrutinize the institutionalized antitrust violations being committed in the name of E.S.G.,” Senator Tom Cotton, Republican of Arkansas, and others wrote in a Nov. 3 letter to 51 major law firms advising clients on environmental practices. With Republicans likely to win back at least one chamber in the midterm elections, conservative lawmakers are gearing up for more of these kinds of fights.

“Inside counsel at major companies who really want to be sustainability leaders see antitrust as their biggest hurdle,” Amelia Miazad, an expert in sustainable capitalism and the founder of the Business in Society Institute at Berkeley Law, told The Times. “Companies cannot continue to produce products for consumers in the future unless they’re able to collaborate.”

THE SPEED READ

Deals

• The actor Matthew McConaughey reportedly may join a potential bid by Jeff Bezos and Jay-Z for the N.F.L.’s Washington Commanders. (N.Y. Post)

• Investment losses at Tiger Global’s flagship hedge fund have grown to nearly 55 percent as the firm’s bets on tech companies and on China suffered. (FT)

• Foxconn will invest $170 million in the electric truck maker Lordstown Motors. (WSJ)

• SoftBank’s C.E.O., Masayoshi Son, reportedly plans to put an end to his memorably unusual earnings presentations. (WSJ)

Policy

• The Justice Department seized Bitcoin once valued at nearly $3.4 billion from a man who pleaded guilty to stealing from the Silk Road online black-market bazaar. (WSJ)

• Oil companies have called Britain “fiscally unstable” as its government weighs a windfall tax on the industry. (FT)

• The Supreme Court’s conservative justices signaled that they were open to further limiting the power of federal regulators like the S.E.C. (NYT)

Best of the rest

• John Tyson, the C.F.O. of the meat processor Tyson Foods, was arrested after he reportedly became intoxicated and fell asleep in the wrong house. (CNBC)

• British companies have an “appalling” shortfall of women in executive positions, according to new research. (FT)

• Inside the messy split — Rolexes and handbags held as hostages and more — of Rome’s soccer legend and his estranged wife. (NYT)

• John Foley, Peloton’s co-founder and former C.E.O., has found his next act: selling custom rugs directly to consumers. (Insider)

• Evelyn de Rothschild, who helped unite branches of his family’s banking dynasty and advised the British government and Queen Elizabeth II, has died. He was 91. (Bloomberg)

Thanks for reading! We’ll see you tomorrow.

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