The results of Tuesday's midterm elections will set the agenda for the next Congress. That could mean changes to fiscal policy, which uses taxes and government spending to influence a country's economy.
But when it comes to the stock market, this election ranks fairly low on the list of things investors should worry about. The economic outlook and corporate profits will ultimately impact portfolios more than seats in Congress.
What's happening: Markets tend to like divided government that will likely lead to gridlock. That's because splitting power in Congress or between Congress and the executive branch reduces the likelihood of sweeping legislation that could present uncertainty for businesses.
But stocks have a bigger problem than who takes the House or Senate: The possibility of a recession ahead. And how deep and prolonged that may be will determine the trajectory of markets.
"Inflation, monetary policy, recession risk, and geopolitics have been far more important drivers of equity market moves than the potential for modest changes in US fiscal policy," wrote Goldman Sachs analysts in a note. Politics have taken a less central role in recent discussions with investors than they have in past election cycles, they added.
High levels of federal debt, inflation and rising interest rates will likely outweigh the economic impact of any potential fiscal stimulus that Congress could enact, they added.
It's all about the Fed: Inflation remains near 40-year highs, and part of the Federal Reserve's mandate is to keep price increases in check. It's monetary policy, which encompasses the management of interest rates, that will matter the most to the market.
"Ultimate political power may remain in the hands of voters, but for the next few years the course of the economy is almost entirely in the hands of the Fed and its blunt tools to tame inflation and support employment," wrote Christopher Smart of the Barings Investment Institute in a note.
The bottom line: When it comes to the next big market catalyst, investors should look to the Fed, not Congress.
And what the Fed does next will likely be determined by the economic data released between now and December, when the central bank holds its next policy meeting. Next up is Thursday's Consumer Price Index report, an important inflation gauge.
As for the midterms, investors may just be happy when the results are final. The market hates uncertainty.
"We expect the impact of the election to tilt the market positive, partly because we'll have it behind us," wrote Barry Gilbert and Jeffrey Buchbinder at LPL Financial. But "the policy impact is likely to be small, and market participants will continue to be more focused on central bank policy and inflation."
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