The big picture is still that during the next two years the U.S. will probably operate with a divided government. Historically that’s a positive for stocks.
Beyond that, investors can look at what is known. More than 90% of earnings for S&P 500 companies are in. Expectations for earnings next year are down and may drop further as consumers cope with inflation and higher interest rates.
The Federal Reserve will certainly keep raising borrowing costs. It’s starting to make noises about slowing down after spending most of the year hiking at the most aggressive pace in decades. At the same time, it’s talking about the terminal rate being higher than previously thought.
What’s more, those rate hikes aren’t going to slow inflation any time soon. It takes time for them to kick in. Until they do, households will have to figure out how to manage paying more for stuff.
While that makes things harder for companies, crypto could be an even worse place to park money. The collapse of Sam Bankman-Fried’s FTX exchange shows just how fragile the ecosystem is. The implications are only starting to be digested by all those who thought Bitcoin was the way to make a quick profit.
Having said all that, the S&P has been higher one year after every midterm election since World War II. The judgment investors have to make is whether this time it’s different.
Midterm Election Outcome Still Up in the Air
The outcome of the midterm election was still in doubt early this morning, with the possibility of a runoff election for the Senate seat in Georgia and still too-close-to call contests in other key battlegrounds, but both political parties were preparing for the possibility that the House could tip in favor of Republicans.
- A divided government means the two main parties will have to work together, given that Democrats still keep control of the White House. That is a recipe for gridlock, and heightened brinkmanship.
- A Republican-controlled House might give momentum to some of their agenda, including border security and tax cuts. But GOP lawmakers face a veto by the Biden White House. It also means another fiscal stimulus or relief bill is unlikely, such as expanded unemployment insurance or small businesses aid.
- The opportunity for brinkmanship will come when Congress needs to approve a federal budget and raise the debt ceiling. Republicans could be emboldened to demand spending cuts, like for social programs or tax enforcement.
- Raising the debt ceiling is another likely battleground. Economists expect the issue will come up sometime late next summer. Some Republicans have already raised the idea of making cuts to Medicare and Social Security before they agree to lift the debt ceiling, a move resisted by the White House.
What’s Next: As of 6.30 a.m. Eastern time, neither of the two leading Senate candidates in Georgia had a greater than 50% vote, with more than 97% of the votes counted, according to Associated Press. That means the two candidates would head to a runoff election on Dec. 6.
—Liz Moyer and Megan Cassella
Crypto Exchange FTX Stumbles, and Binance Swoops In
The crypto exchange FTX, once considered the white knight to a troubled industry, stumbled with a run on its own liquidity, and rival Binance came to its rescue, saying Tuesday it intends to buy FTX’s non-U. S. trading platform. The move highlights the fragility of the largely unregulated crypto industry.
- Binance is the largest cryptocurrency exchange by volume, run by CEO Changpeng Zhao, or CZ. FTX is closely affiliated with the trading firm Alameda Research and created the digital token FTT. CZ said this weekend that Binance was exiting all its $600 million in FTT, sparking panicked crypto selling.
- FTX CEO Sam Bankman-Fried tried to soothe nerves, but ultimately CZ said FTX asked for its help. CZ could still pull out of the nonbinding letter of intent to buy FTX.com. Neither firm commented to Barron’s. FTX earlier this year threw financial lifelines to BlockFi and Voyager.
- Bitcoin’s trading stabilized right after the deal was announced, but ended up falling 10% on Tuesday, to around $18,642. Ethereum fell 15%, to $1,333. The FTT token is down 75% in the last 24 hours, according to CoinDesk.
- The swift unraveling of FTX demonstrates the vulnerabilities of the crypto industry, which is subject to customer runs, said John Reed Stark, a former Securities and Exchange Commission enforcement attorney and crypto critic. Crypto doesn’t face the same regulatory oversight as other investments to protect investors.
What’s Next: Bankman-Fried has been one of the crypto industry’s biggest faces in Washington, testifying in Congress many times and meeting with lawmakers. The saga will likely strengthen calls from lawmakers and agencies to more heavily regulate crypto firms, analysts told Barron’s.
—Janet H. Cho and Joe Light
Musk Sells More Tesla Stock After Twitter Deal
Investors were waiting for stock sales from Tesla CEO Elon Musk, guessing he needed to sell more shares to finish his Twitter purchase. He sold $3.95 billion of it, but it happened after the Twitter deal closed, according to filings late Tuesday
- The cash raised by selling stock might have been needed to finish off paying for Twitter, but it’s hard to pin that down. Musk didn’t respond to a request for comment.
- Tesla stock is down about 11% over the past three days. The Nasdaq Composite is up almost 3% over the same span.
- Before the deal’s closing it looked as if Musk needed to sell another $5 billion to $10 billion of stock to finish the purchase—accounting for his prior stock sales, equity from third parties, debt and the need to pay off Twitter’s stock-based compensation.
- After the November sales, he has about 446 million shares of Tesla left, excluding his stock options. That is roughly 12% of Tesla’s stock outstanding.
What’s Next: Tesla shares might bounce after Tuesday’s announcement if traders see selling pressure abating. Tesla stock rose about 2% in the few days following the Twitter deal closing.
Disney Earnings Highlight Streaming Challenges
Walt Disney reported a mixed bag of earnings and said it would trim marketing and content budgets after a bigger than expected loss in its three year old Disney+ streaming business led to weaker than expected fourth quarter results despite strong results from its theme parks.
- The Disney+ platform added 12.1 million net new subscribers, to 164.2 million, which beat expectations. But the streaming segment lost $1.47 billion, which is more than twice the loss in the same quarter last year and worse than expected. The stock dropped 10% after hours.
- Disney reported $20.2 billion in sales for its fiscal fourth quarter, up 9% from the same period last year but below Wall Street’s target. Adjusted earnings of 30 cents a share were far short of the 56 cents that analysts expected.
- The results show the difficult balancing act Disney has between spending money to develop popular streaming content that lures in new viewers and charging the right price for that content. Theme parks had record quarterly revenue of $7.42 billion, up 36% from last year.
- Separately, AMC Entertainment beat third-quarter expectations, and sold 14.9 million of its APES preferred shares for $36.4 million in net proceeds. While the industry’s box office sales have been slow, CEO Adam Aron said per-patron spending on admissions and snacks is above prepandemic levels.
What’s Next: Disney CEO Bob Chapek’s outlook for the streaming business remains rosy. He said realigning costs, including price increases for some Disney+ packages and an ad-supported subscription tier starting Dec. 8, will allow the platform to achieve profitability by Sept. 2024.
—Nicholas Jasinski and Janet H. Cho
Affirm’s Quarterly Loss Tied to Slowdown in Peloton Spending
Affirm shares plunged 19% in after-hours trading after the buy-now, pay-later company reported a wider-than-expected loss for its fiscal 2023 first quarter. Turns out users of the service have been buying fewer Peloton bikes since the height of the pandemic, weighing on results.
- While gross merchandise value on the platform rose 62% over last year, it grew more excluding the effect of Peloton, which was the largest merchant on its platform last year. Peloton was just 2% of gross merchandise value in the fiscal year first quarter 2023, it said, down from 23% last year.
- Affirm is projecting full fiscal year GMV of $20.5 billion to $21.5 billion and revenue of $1.6 billion to $1.68 billion. Both are down from the higher end of its earlier projected ranges.
- The number of active merchants on the platform increased to 244,900 from 235,000 from the fourth quarter, while Affirm’s count of annual active customers ticked up to 14.7 million in the September quarter from 14 million in the June quarter.
- Affirm, a platform that allows consumers to buy an item and pay for it in four payments spread over a matter of weeks or months, hasn’t seen much weakness in the consumer, noting that its delinquency rates remain at or below prepandemic levels.
What’s Next: Despite rising funding costs and competition from other fintechs and payments giants such as Mastercard, analysts expect Affirm to manage through. The lender expects revenue of $400 million to $420 million in its fiscal second quarter, up from $362 in the first quarter.
—Janet H. Cho
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