Traders Embrace Gridlock

Major averages rally ahead of the midterm elections. Meanwhile, the housing debate rages on.
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The midterm elections took center stage for investors Tuesday, despite the likelihood that their outcome won't mean much in the way of policy change.

Unlike most voters, the markets are embracing the very lack of impact these election results might have. Studies show that gridlock is not reliably good for stocks, but investors have short-term memories. They are focused on "gridlock as good," the way it was good for stocks when the late-1990s Clinton administration faced gridlock on Capitol Hill.

According to a variety of electronic futures trading platforms from Tradesports.com to News Futures, odds vary between 55% and 90% that the Democrats will win control of the House of Representatives, according to a round-up done by Slate.com. Odds are similarly weighted to the idea that the Republicans retain control of the U.S. Senate.

"We virtually get guaranteed gridlock for the next two years, which means no huge regulatory or fiscal changes on the horizon," says Art Hogan, chief market analyst at Jefferies & Co. "With that aside, the market can focus on fundamentals."

The three major stock indices pushed higher again Tuesday after a strong rebound Monday following six weak trading sessions. The

Dow Jones Industrial Average

reached an intraday all-time high Tuesday at 12,196.32, but fell back to finish the day up just 0.42% to close at 12,156.77. The

S&P 500

ended the day up 0.2% to close at 1382.84, and the

Nasdaq Composite

finished up 0.4% to close at 2375.88.

The industrial giants fared well Tuesday, still gaining on the heels of Friday's strong jobs report and Monday's deluge of M&A activity.

Shares of

Boeing

(BA) - Get Report

took off 5.4% on news that

FedEx

(FDX) - Get Report

decided to scrap its order for Airbus freight planes in exchange for 15 Boeing planes. Shares of FedEx gained 1% on the day, and the stock experienced what technicians call a "golden cross," meaning that its 50-day moving average crossed its 200-day moving average, with both climbing.

With all the angst around the economic outlook, shares of FedEx, oft considered an economic proxy, could go either way after such a typically bullish event. Shares of FedEx have had golden crosses 17 times in their history, and the stock price has climbed 11 of those times one month from the date of the event, according to Birinyi Associates. Birinyi says the stock is slightly overbought, but money flow into its shares remains strong.

Behind the stock market advances, a debate rages between economists, some Fed speakers and the leaders of the homebuilding companies as to how far the housing market will slow -- and by extension the broader economy.

While not new to the markets, two homebuilders lamented the state of their industry on Tuesday.

Toll Brothers

(TOL) - Get Report

and

Beazer Homes

(BZH) - Get Report

reported declining profits, huge drops in orders and high levels of cancellations. Toll Brothers' Chairman and CEO Robert Toll says "the recovery is imminent" but he "can't yet say that one is in sight." Toll's shares fell 0.04% on the day, while Beazer's shares gained 0.3%.

Shares of competitors

Centex

(CTX)

,

D.R. Horton

(DHI) - Get Report

and

Pulte Homes

(PHM) - Get Report

fell harder, logging 1.29%, 2.01% and 0.70% declines respectively on Tuesday. The Philadelphia Stock Exchange Housing Sector Index fell 0.6%.

Elsewhere, shares of financial services provider

H&R Block

(HRB) - Get Report

climbed 6.35% on news the company is considering selling its subprime mortgage business, which the company says has fallen prey to past-due mortgages and weakening demand for new loans.

While industry leaders tell a sad story of a weak housing market, analysts and investors say the stocks are in a bottoming process. Such investors may be listening to Fed speakers instead of Robert Toll

et al

.

"I expect the economy to weather the recent challenges in the housing market," said Cleveland Fed President Sandra Pianalto in a speech Monday night in Pittsburgh.

Pianalto echoed comments made earlier Monday by Chicago Fed President Michael Moskow at a Chicagoland Chamber of Commerce event. He said he expects economic growth to pick up from its 1.6% third-quarter pace. "On balance, the 95% of the economy outside of housing remains on good footing," he said.

The debate is likely to continue about housing and the economy, but the elections will mask most of the drama, at least until the voting results are clear.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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