Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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The US Midterms: An Uncertain Outcome

“Election Day has come and gone and the votes are still being counted. Exactly which party will control the Senate and House of Representatives is yet to be decided…

Should Republicans win control of the House, Alice Joe, a vice president on Fidelity’s Government Relations team, expects the party to use the chamber’s vast oversight powers to take a closer look at many Biden administration policies. Regulatory agencies will also face more scrutiny, and could be reined in from a more aggressive agenda. She also believes House Republicans are likely to try to pass bills focused on taxes, energy independence, strengthening the supply chain, and cracking down on illegal immigration and crime. These will be messaging bills that shape a Republican agenda leading to the 2024 presidential elections, with little chance of being enacted into law in the 118th Congress.

A Republican Senate would likely present a major roadblock for President Biden, potentially hampering his ability to appoint cabinet officials, judges, and other positions that require Senate confirmation. However, if Democrats manage to keep the Senate, they will likely be focused on confirming Biden nominees, especially for judicial appointments that could last beyond the duration of the president’s term.

Even under divided government, there could still be opportunities for bipartisan cooperation. Joe points to the pending SECURE Act 2.0, which would implement reforms around retirement savings. Joe expects it to pass as part of a year-end spending bill sometime before the end of this year…

‘The year following the midterm elections tends to be the year with the narrowest range of returns—whether or not there's a change in control.

Historically, we've seen the best average returns in the 12 months following the midterm elections. The worst average returns with the highest variability in outcomes historically have been in the 12 months preceding the midterm election. The returns are still positive, just not as high. So, in the past, what we've seen is the 12 months following the midterms have had the least amount of variance, and the least amount of downside.’”

This was a good, straightforward recap of the midterm elections from a policy and market perspective. Markets tend to slightly prefer divided governments (see the Graph of the Week below); however, monetary policy rather than fiscal policy has always been the driver of markets.

Inflation moderates, rising at an annual 7.7% over last year

“U.S. inflation eased slightly last month as the Federal Reserve raised interest rates to get a grip on prices that have surged at a historic pace.

The Consumer Price Index (CPI) in October reflected a 7.7% increase over last year and 0.4% increase over the prior month, the Bureau of Labor Statistics said Thursday. Economists had expected prices to rise at an annual 7.9% clip and 0.5% month-over-month, per Bloomberg consensus estimates.

On a "core" basis, which strips out the volatile food and energy components of the report, prices rose 6.3% year-over-year and 0.3% over October. Expectations called for a 6.5% annual increase and 0.5% monthly increase in the core CPI reading. Core CPI's decline was meaningful after the measure hit its highest level since 1982 in September…

The report propelled U.S. stocks forward and sent Treasury yields tumbling as Wall Street weighed the implication of softer prints on Federal Reserve policy. Moderations in economic data have prompted hopes that the U.S. central bank will scale back on its aggressive policy stance, but Fed Chair Jerome Powell stressed earlier this month that no plans for a pause were underway.”

Stock markets had their single best day in more than two years. US markets were up more than 5%, the 10-year US Treasury yield fell under 4%, and the US dollar fell more than 2% on the release of moderating inflation data. Risk assets have been begging for better news on inflation and a potential downshift in Federal Reserve policy. They finally got something to chew on Thursday.

Behind FTX's fall, battling billionaires and a failed bid to save crypto

“The 30-year-old [CEO Sam Bankman-Fried] had set up Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, accumulating a near $17 billion fortune.

News of the liquidity crunch at FTX – valued in January at $32 billion with investors including SoftBank and BlackRock – sent reverberations through the crypto world.

The price of major coins plummeted, with bitcoin slumping to its lowest in almost two years, heaping further pain on a sector whose value has fallen about two-thirds this year as central banks tightened credit…

This May and June, Bankman-Fried’s trading firm, Alameda Research, suffered a series of losses from deals, according to three people familiar with its operations…

Seeking to prop up Alameda, which held almost $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, the people said. Alameda had disclosed a 7.6% share in Robinhood that May.

A portion of these FTX funds were customer deposits, two of the people said, though Reuters could not determine their value.

Bankman-Fried did not tell other FTX executives about the move to prop up Alameda, the people said, adding he was afraid that it could leak.”

This is one of the more fascinating stories that I’ve followed in the past several years. Sam Bankman-Fried was the face of the cryptocurrency industry. He was on the cover of Fortune magazine, near the top of the Forbes billionaires list, and one of the largest US political donors, and his company FTX was the 3^rd or 4^th largest cryptocurrency exchange with major celebrity investors/advertisers and stadium naming rights deals. Now, it’s in bankruptcy. And, his largest competitor and former investor (Binance and CEO Changpeng Zhao “CZ”) helped take him down.

Reports are that author Michael Lewis has been working on a cryptocurrency book that features SBF. That should be entertaining.

It’s a "Lehman" moment for cryptocurrency. The industry and markets are still unregulated. Even though private equity and retail money has poured into them, it’s the Wild West.

Historically, according to the Dow Jones Industrial Average, a Democrat President / Democrat Senate / Republican House has resulted in the highest average annualized market returns of +13.6%. However, we've only had that combination occur for 4 years going back to 1900 (2011-15). A Democrat President / Republican Congress has been much more common and resulted in average annualized market returns of +13%.

Thanks for reading. Have a great weekend!