Stocks globally gave back some of the previous week’s gains after the Federal Reserve signaled a potential need for even tighter monetary policy. The MSCI All Country World Index dipped 1.4% while the S&P 500 tumbled 3.4%. The tech-heavy NASDAQ slumped 5.6% as news of upcoming layoffs spread. Equity markets overseas outperformed with European stocks adding 1.0% while Japanese stocks rose 1.1%. Emerging market stocks surged 4.7% as investors embraced the prospect of a further reopening in China.
The Federal Reserve hinted that it may downshift the size of its rate hikes at its December meeting. However, it also suggested that there may be several more rate hikes ahead. Investors are now expecting a terminal fed funds rates that is north of 5.0%.
U.S. midterm elections will occur this week. Since 1982, the ruling party has lost an average of 22 House seats and 4 Senate seats. In fact, the president’s party has only gained seats in the House twice since the Civil War in a midterm election. A divided government seems highly likely, but the results may not be known immediately. Defense, aerospace, oil services, and big pharma stocks may be seen as benefitting from a Republican win while green energy and cannabis stocks could be seen as losing.