Overnight on Wall Street, the S&P 500 rose 1 per cent, while the Dow Jones Industrial Average gained 1.3 per cent and the Nasdaq composite added 0.9 per cent.

Analysts say many investors seem to be making bets that Republicans will take control of at least one house of Congress. With a divided government, gridlock is more likely than big, sweeping policy changes that could upend tax and spending plans. And historically, when a Democratic White House has shared power with a split or Republican Congress, stocks have seen stronger gains than usual.

“The conventional wisdom that the stock market likes political gridlock is supported by the historical data in this instance,” according to Lori Calvasina, head of US equity strategy at RBC Capital Markets.

Of course, that means a better-than-expected performance by Democrats in the midterm elections could hurt stocks. Investors may fear emboldened Democrats in such a scenario would push for increased spending to help the economy. That in turn could be a signal that the Federal Reserve would have to hike interest rates even higher to get inflation under control.

A Republican win would also introduce its own risks. It could again encourage Republican brinksmanship around the nation’s debt limit and threaten another government shutdown, according to strategists at Morgan Stanley.

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Either way, markets may have to wait awhile to get clarity because of the process to count votes that came in through the mail.

In the meantime, Wall Street is looking ahead to a report scheduled for Thursday, when the US government will show how bad inflation was across the country last month. And that will influence what’s been the main driver on Wall Street this year, much more than politics: what the Federal Reserve does on interest rates.

Economists expect the report to show that the consumer price index was 8 per cent higher in October than a year earlier, which would be a slight slowdown from September’s 8.2 per cent inflation rate.

A fourth straight month of moderating inflation from June’s 9.1 per cent rate could offer some relief. Such a trendline could also give the Federal Reserve leeway to loosen up a bit in its campaign to hike rates aggressively to force inflation lower.

The Fed has said that it may soon dial down the size of its increases to half a percentage point, after pushing through four straight mega increases of three-quarters of a point. Higher rates put the brakes on the economy by making it more expensive to buy a house, car or anything else on credit.

with AP

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