Control Panel: Post-election hype?

Investment Analysis Clubs Macro Economic Trends and Risks
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Partisan politics is banned on METAR, including discussion of proposed legislation that hasn’t been signed into law yet. That’s to avoid bickering over ideology and wasting time over debating legislation that may never become law (as most proposals fail).

However, the election has had an immediate impact on the markets. That’s because the election was at least partially powered (at all levels, from local to national) by the overwhelming push-back against AI data centers. And the SPX (and especially the NAZ) have been powered by AI trades into a historic bubble.

https://www.wsj.com/finance/stocks/dont-trust-the-markets-knee-jerk-reaction-to-the-midterms-8702b17c?mod=hp_lead_pos8

Don’t Trust the Market’s Knee-Jerk Reaction to the Midterms

Politically driven trades can be justified, but they might backfire once postelection hype settles down

By James Mackintosh, The Wall Street Journal, Nov. 8, 2026

…
The problem for AI is new governors who promised moratoria on data centers, including some in states with a lot of construction planned, such as Texas and Ohio…

After an election, the consensus frequently swings toward an investment thesis so obvious that few could disagree—yet it ends up losing money, even if it eventually comes good…

[snip several examples of trades that reversed]

I thought chip and data-center stocks ought to be a lot cheaper given the risks hanging over them. The new politics adds another threat—but is probably not as severe as the consensus trade suggests. When it comes to politics and the markets, no one knows anything. [end quote]

That’s right. When it comes to politics and the markets, no one knows anything. Especially when both the technology and the politics are in flux. And especially when the market is in a bubble that is driven by AI companies who are vulnerable to open-source competition from China as well as low-priced distilled AI applications driving down demand for expensive frontier AI.

The stock market carnage last week was focused on tech-related issues. This can be seen in the drop in NAZ and the SPX relative to the DJIA. VIX (volatility of the tech-driven SPX) was higher relative to VIXEQ (the equal-weighted SPX).

With the risk premium for holding equities compared with Treasury bonds close to zero, traders have been shifting toward the certainty of high Treasury yields.

The entire Treasury yield curve continued to drop (rising bond prices cause falling yields). The yield curve is relatively flat. Investors are only being paid 0.35% more for buying 10 year Treasuries relative to 2 year Treasuries.

High-yield credit is falling relative to Treasuries. The junk bond spreads over Treasuries are widening. This is a trend change that began at the start of October. Credit spreads widening ahead of an equity sell-off is a classic macro divergence. Fixed-income markets began pricing in higher borrowing costs, debt refinancing hurdles, and capital expenditure drag—especially for lower-rated or highly leveraged tech and infrastructure borrowers.

The trade is risk-off. The Fear & Greed Index is in Extreme Fear.

Gold, silver and oil are in falling trends. USD is stable.

The economy continues to grow.

Economic activity in the services sector continued to expand in October, say the nation’s purchasing and supply executives in the latest ISM® Services PMI® Report. The Services PMI® registered 54.5 percent, the 28th consecutive month in expansion territory. The Manufacturing PMI® registered 55.5 percent in October, 1 percentage point above the September figure of 54.5 percent. The overall economy expanded for the 24th month in a row.

The Atlanta Fed’s Fourth-Quarter GDPNow Estimate for 2026:Q4 is 3.4%. This is a strong but potentially achievable growth rate. Percent Change in Real GDP in 2Q26 was 2.2%.

The Cleveland Fed’s Inflation Nowcast is much higher than the Fed’s target of 2.0%.

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The options market predicts a 75% probability that the Fed will raise the fed funds rate by 0.25% in December.

https://www.wsj.com/economy/central-banking/the-democratic-surge-will-cap-trumps-reach-at-the-fed-6b706e11?mod=hp_lead_pos4
A new Democratic Senate majority will have the power to block any allies President Trump might seek to install on the Federal Reserve Board.

Kevin Warsh has stated that fighting inflation is the first priority of the Fed. The Supreme Court has defended FOMC member Lisa Cook, who voted to raise the fed funds rate in September, against bogus accusations.

The markets will read this as “higher for longer” for the fed funds rate, which impacts short-term loans like credit cards - and margin loans.

Despite this, Margin, which closely correlates with SPX, continued to climb in September although it is not yet back to the record set in June 2026 when the climb of the SPX plateaued. The problem is that the combination of Extreme Fear, high stock market margin and a tight (and rising) fed funds rate could lead to sudden selling.

The markets will probably be discombobulated for the next couple of weeks until potential new trends firm up.

But the tightening of junk bond spreads is an early warning sign. From Gemini:

The relationship between high-yield credit spreads (HY OAS) and equity market drawdowns during Federal Reserve tightening cycles provides a structural early-warning mechanism. Because fixed-income investors prioritize capital preservation over capital appreciation, the bond market historically identifies corporate balance sheet vulnerability long before equity markets digest the risk. …

Stocks often continue rallying late in tightening cycles due to momentum, retail sentiment, or earnings concentration in low-leverage mega-caps. Eventually, high interest costs and tightening credit drag down corporate earnings and trigger forced margin unwinds, initiating an equity drawdown…

The 400–500 bps Rule of Thumb: Historically, when ICE BofA High Yield Option-Adjusted Spreads (HY OAS) cross 450–500 basis points during a Fed tightening regime, systemic de-risking in equities accelerates rapidly.[end Gemini]

Gemini listed four cycles since 2000 with this pattern, each with major SPX drawdowns. The High-yield Option-Adjusted Spread is currently 3.48%. The distressed end is 13.2%. Wow!

The METAR is cloudy with periods of sun and showers. But the METAR is only a short-term forecast. Remember what happened in 2008 when President Bush handed President-elect Obama a poop on a platter - the 2008 financial crisis.

Wendy

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/october/

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/october/

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool

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The post-election high, personally, for me and plenty of friends, has been resolved by a downer period. Things stink. We have money, relationships, and time, but this is a very unsatisfying reality.

The AI boom has been in the throes of ending. One more Musk dream going down the tube.

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With the exception of data center regulation & legislation, it looks to me that little will change in the next 2 years.

Trump’s signature economic accomplishment was last year’s passage of the One Big Beautiful Bill Act. Democrats won’t be able to unwind the bill’s major provisions, like tax cuts for high earners, since Trump has veto power over legislation.

Markets tend to like divided government, with the S&P 500 up 1.6% Wednesday, as investors embraced the prospect of a split between Congress and the White House. History suggests that optimism is warranted.

Where investors may notice a bigger difference is in individual sectors, specifically in AI. Data-center buildouts may be in for greater oversight as Democrats take control in states and in Washington.

The election brought some immediate relief in oil markets, with Brent crude tumbling nearly 9% on Wednesday as investors bet the Democratic sweep would increase pressure on Washington to wind down the conflict.

*Democrats can’t end the war on their own, but they can push back on the White House’s $1.5 trillion budget request for the Pentagon and propose an oversight panel to handle investigations into the war with Iran. *

Democrats could challenge Trump’s trade policies, since tariffs are another big driver of inflation. Undoing tariffs with legislation could be tough since Trump has veto power.

Democrats turned housing into a powerful rallying cry on their way to the midterm elections. Their new majorities in both houses of Congress will give them more power to reshape federal housing policy. But they can’t control mortgage rates, now above 7% and the biggest obstacle to easing affordability anytime soon.

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I agree, at this stage of the game. If the economy goes to ruin? Or in 2029?

The American public, though, wants tax hikes. If plumbers, electricians, and teachers hear that brackets will be added at higher rates without increasing taxes at the lower brackets, this is an easy matter to resolve.

Claude search

Roughly 60–75%, depending on the poll and how the question is worded:

  • Verasight (2026): About 73% say it would be fair to raise wealth taxes on billionaires, and about 67% say the same for large corporations.
  • Gallup (April 2025): 58% think upper-income people pay too little in taxes, one of the lowest readings Gallup has recorded; the high was 77% in 1992–93. 70% say corporations pay too little, a view that has held steady since Gallup started asking in 2004.
  • Pew (March 2025): Most Americans still say taxes should go up, not down, for large corporations and for household income over $400,000. Republicans are split; about a third (32%) now want corporate rates lowered, up 9 points from April 2023.
  • Emerson/RCP (Pennsylvania, 2026): 64% back higher taxes on billionaires, wealthy corporations and Big Tech to fund healthcare, food access, transit and education.

None of these polls asked about CEOs as a separate group. They fall under “wealthy” or “upper-income.”

The main dispute is about what the numbers mean. A business group citing that Pennsylvania poll argues people support higher rates mainly because they underestimate what the wealthy pay. Respondents guessed the wealthy pay about 21% on average. Support also falls when a poll mentions trade-offs. Partisan gaps are large, with Democrats far more supportive than Republicans.

Sources:

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I would remind you that two out of those three professions generally makes in six figures a year (if unionized) and is far from poor - and might be concerned if their own taxes went up. There are allso more than a few politicians who would find it difficult to explain to their biggest donors why their thank you would be higher taxers on them, but not on mere mortals.

Jeff

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Actually that is what I am saying.

Also plumbers and electricians with trucks on the road make in the $600k area routinely. That is in the top bracket neighborhood. More brackets need to be added far north of them.

By not allowing modifications towards higher taxes for years now the economic over extending is going to be very bad news. In the middle of a dramatic downturn this discussion is different.

Also I would have guessed 35% corporate taxes would be reasonable if instituted years ago. A few years from now with an economy in ruins 50% will be necessary.

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