This Week's Key Events -- Negative for Stocks?

The stock market may have trouble with the two key events this week -- the midterm elections (Tuesday) and FOMC Meeting (Wednesday-Thursday) -- even if their outcomes match widely-held expectations.  While the US economic calendar is light, Monday's October Non-Mfg ISM is likely to fall.

Mid-Term Elections
The conventional view is that a resulting split Congress, with the Democrats controlling the House and Republicans the Senate, would be a mild positive for stocks, based on history.  Stocks rallied on a split Congress in the recent past.  This past tendency, however, may not play out this time.  Two reasons are: 

1.  A split-Congress was viewed positively by stocks in the past because it would prevent anti-business or re-distribution legislation from being passed.  This time, it could prevent passage of pro-business laws.  It also could be viewed as hurting Trump's bargaining power in trade negotiations with China and the EU.

2.  If the Democrats and Republicans find common ground, such as infrastructure spending as some have reported, this would prompt financial markets to move further to crowd out other spending -- given the economy is operating near full employment.  Longer-term yields and dollar would rise and stocks fall. 

Even a follow-through of Trump's promise of a post-election executive order to cut middle-income taxes would not likely be a positive for stocks.  It also would push the financial markets to crowd out other spending.

FOMC Meeting
There is not likely to be any significant change in the FOMC Statement from what it was in September.  It may no longer describe business fixed investment as strong, but that is minor.  Nevertheless, the Statement should underscore the Fed's intention to tighten gradually, with no hint of skipping December.  Repeating September's language also would accommodate the idea that future rate hikes will be data dependent.  With the door still open to the Fed's tightening plans, the markets could be disappointed.

Post Mid-Term Election Rally?
Overall, there may be too much talk of a post mid-term election stock market rally for it to happen as yet.  These historical/seasonal patterns have not held in the past 3 months.  And, a re-test of the stock market's lows may be needed to dash this talk before a rally is possible.  A re-test may happen this week.  But, it may be short lived.  A low October Core CPI print (due November 14) and firmer positive comments out of the White House regarding the November 29 Trump-Xi Jinping meeting are potential catalysts for a rally.