Wall Street is surveying the damage threatened by Democrats taking over Congress – and it shouldn’t be a surprise that “indigestion,” “stomach-churning” and “puke” are the operative terms across trading floors this week.
After the Dem tsunami on Tuesday night, Wednesday was supposed to be gut-wrenching for the markets. Left-wingers are now controlling the House and Senate. DSA types and avowed progressives like James Talarico and Abdul El-Sayed won Senate seats in Texas and Michigan — states that had been red in the 2024 presidential election.
But to the surprise of many, the Dow on Wednesday spiked more than 3% – or around 1,500 points – along with similarly impressive jumps in the S&P and Nasdaq, as investors took the more pollyannaish view that gridlocked government can actually be a plus for the economy and stocks.
Instead, the reckoning came a day later as jitters kicked in about a socialist takeover of Capitol Hill and President Trump’s lame-duck status thwarting his pro-growth agenda. The Dow on Thursday lost nearly all its gains Wednesday. The tech-heavy Nasdaq fell 5%.
The carnage might not end anytime soon. One CEO of a major Wall Street firm predicts hedge fund liquidations adding selling pressure to stock indices including tech and AI related shares where losses will be greatest given the run up and bubble recently created in valuations. “There are more hedge funds to be carted out,” he tells me. “We’re setting up for a market bottom.”
What gives? As a reporter who has covered market zig-zags for decades, I can tell you that while this week’s whiplash has been extreme, it’s basically how price discovery on stocks always works.
In other words, it’s part of investors’ collective digestive process – similar to eating a bunch of White Castle burgers. It tastes good going down, only to spur wicked indigestion — and a literal and figurative “puke” — once it settles in your stomach.
Like those greasy slabs of meat (or whatever it is you get at 3 a.m. after a night on the town), the aftermath of the lefty takeover of Congress isn’t settling right in the stomachs of investors.
On Tuesday, investors were taking the glass-half-full view: The Dems still don’t have a veto-proof majority and President Trump will use his pen to thwart tax increases. The White House still controls the regulatory apparatus, which means the AI buildout will continue to pump money into the economy and add to earnings growth. Our current GDP growth is a healthy 3.4%.
Also, what sometimes can be fairly called “bad news” for the American people and the economy can often be really good for stocks. That generally occurs when the market is hooked on a certain drug of choice – easy money from the Federal Reserve – as it is today.
The immediate reaction to Dems winning is that the Fed could start pumping liquidity into the economy if they did something really bad, or at least no longer taking it out. That means lower interest rates, or at the very least, a cessation of recent rate hikes.
Plus AI stocks could oddly benefit. Bob Sloan of S3 Partners points out that one of the biggest “casualties” of the Dems being elected will be a slowdown (maybe a halt) to the AI buildout as companies feel heat from looming congressional investigations.
But as Sloan put it: “The people that are funding the AI buildout all of a sudden maybe don’t have to spend so much money – they can save for themselves, almost.”
Then the indigestion set in. For all the potential negatives of AI (bots ruling the world, commoditization of jobs, etc.) the buildout also creates jobs, particularly good paying blue collar work and productivity that spurs economic growth. Companies at the forefront of the technology are reporting surging revenues. Scale that back and the economy could turn negative with stocks.
And that’s the pukey feeling the market was grappling with Thursday. The Dems can’t stop the AI juggernaut, but they can slow it down. Probes and hearings are likely, and investors are now betting that people like Dario Amodei of Anthropic and OpenAI’s Sam Altman may just decide keep their companies private instead of risking the ire of the likes of Elizabeth Warren and Maxine Waters – both of whom are now have the bully pulpit to make their lives miserable.
It’s why you saw some of the biggest losses on Thursday in the tech-heavy Nasdaq. Ditto for banks, another market leader that will be the target of left wing populist ire, and of course, Elon Musk, with Tesla and SpaceX — two of the market’s hottest stocks — likely to be another juicy target.
Yes, put it all together and it may be time to bow to the porcelain once again.
