Markets Whipsawed on the Election Results. Did Anything Really Change?

Stocks, oil, gold, and the dollar raced to respond as Democrats swept Congress, but Fed rate hike bets barely moved. Time to worry about the economy again?

• Stocks reversed an initial election selloff, but the downtrend from early October remains intact
• Crude oil tumbled as markets seemingly bet a new Congress will hasten the end of the US-Iran war
• US service-sector growth slowed more than expected as new orders and business activity cooled

Markets swung violently as US midterm election results rolled in. Stocks initially sold off as a Democratic wave swept both chambers of Congress and President Trump vowed to veto the incoming majority’s agenda. Traders seemingly braced for gridlock that would stall fiscal policy, much of which had been on an expansionary path, along with progress on priorities like AI regulation.

The S&P 500 then stormed higher to erase the losses. That probably says more about relief at the passing of potent event risk than about a change of heart. With the outcome known, it is no longer the object of speculation. Pointedly, the rebound leaves the structure of the decline from early October intact, with lower highs and lower lows still in place.

The tech-heavy Nasdaq 100 looks soggier still. It clawed back into positive territory by the daily close but stalled below levels that served as support until sellers emphatically broke them last week. This keeps the late-July lows near 27,500 in play. That matters for the broader market. The equal-weighted S&P 500 and a version of the index that excludes technology have climbed since the start of October, while the benchmark itself has fallen. Strength outside tech has plainly failed to offset wherever the biggest names want to go.

Crude oil plunged, as if markets expect the change in Congress to end the US-Iran war in a hurry. Gold and silver rallied as the results crossed the wires but now press against the underside of the ranges they broke last week, raising questions about upside follow-through potential. The US dollar fell against most major currencies.

The economy’s largest engine is sputtering

With the election behind them, traders may now turn back to economic data. The Institute for Supply Management (ISM) services survey, released as voting results washed over markets, showed the sector expanding at a slower pace in October. Its purchasing managers index (PMI) fell to 54.5 from 54.9 in September, undershooting forecasts of 54.8 and marking a second consecutive decline to the lowest reading in about four months. That sharply contrasts with the ISM manufacturing gauge, which hit its second-highest level in four years over the same period.

The details look worse. Employment picked up, but new orders slowed to 55.9 from 59.8, and business activity dropped to 53.8 from about 56. The prices gauge eased to around 73 from 74.

That weakness hits where it hurts. Services account for close to 70% of the US economy and absorb most consumer spending, which makes up 68% of gross domestic product (GDP). Third-quarter data showed how strained that engine has become. Consumption added 2.52 percentage points to 3.4% growth, but costly imports subtracted 2.64 points, leaving investment in AI data centers to carry the load. Business investment is roughly one-fifth the size of consumer spending. Pricey energy, tariffs, and cost-of-living worries are squeezing households, and those concerns likely showed up at the ballot box too.

Did the election change the Fed outlook?

Fed policy bets suggest not. Markets still fully price a rate hike by January and another by June. Expectations have been sliding since early October, when as many as three hikes were in play for 2027, and they barely budged as the results came in. The Fed itself projects none next year.

The upshot is that the election delivered plenty of noise while leaving the core story untouched. A cyclical risk is building in an economy leaning heavily on the AI boom as consumers come under strain. If incoming data keep confirming it, bonds may extend gains and the US dollar may keep losing ground, while tech-heavy stocks may struggle to sustain a recovery. October’s jobs report on Friday is the next test.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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