U.S. stock markets closed sharply higher ahead of the midterm election of the U.S. Congress. However, investors remained watchful of a record-high inflation as it will determine the Fed’s next course of action. All the three major stock indexes ended in positive territory.

How Did The Benchmarks Perform?

The Dow Jones Industrial Average (DJI) surged 1.3% or 423.78 points to close at 32,827.00. Notably, 27 components of the 30-stock index ended in positive territory while three in red. The tech-heavy Nasdaq Composite finished at 10,564.52, rising 0.9% due to strong performance of large-cap technology stocks.

The major gainer of the tech-laden index was Meta Platforms Inc. (META Quick QuoteMETA - Free Report) following The Wall Street Journal report that the social media giant mulls a large-scale retrenchment effective this week and for the first time in the company’s history. The shares of Meta Platform surged 6.5%. The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The S&P 500 gained 1% to end at 3,806.80. Nine out of 11 broad sectors of the benchmark index closed in positive territory while two in red. The Communication Services Select Sector SPDR (XLC), the Energy Select Sector SPDR (XLE) and the Technology Select Sector SPDR (XLK) advanced 1.8%, 1.7% and 1.7%, respectively. However, the Utilities Select Sector SPDR (XLU) tanked 1.9%.

The fear-gauge CBOE Volatility Index (VIX) was down 0.8% to 24.35. A total of 10.05 billion shares were traded on Monday, higher than the last 20-session average of 11.8 billion. The S&P 500 posted 18 new 52-week highs and 15 new 52-week lows. The Nasdaq Composite registered 93 new 52-week highs and 221 new 52-week lows.

Wall Street Waits for Midterm Election

The U.S. Congressional midterm election is scheduled on Nov 8. This election will be important to determine future course of the U.S. government spending. At present, democrats control the House of Representative and have a slender edge in the Senate.

Wall Street generally likes a split Congress. Currently, the United States is having democrat President. A Republican controlled House or Senate or both is likely to create a stalemate regarding future government spending. Lower or no government spending may result into reduced inflation and interest rates.

An Ultra-hawkish Fed

In its latest FOMC meeting in November, the Fed has raised the benchmark interest rate by 75 basis points to the range of 3.75-4%. This was the fourth consecutive FOMC meeting where the Fed raised the lending rate by 75 basis points. The current range is the highest since January 2008 and marked the most aggressive pace of monetary policy tightening since the early 1980s.

The 75-basis point rate hike was expected but the investors were actually waiting for Fed Chair Jerome Powell’s comments as they were hopeful that the central bank might go slow on its pace of rate hikes in the coming months as economic data released last week hinted at inflation easing.

However, their hopes were dashed as Powell’s hinted that it is too premature to think about pausing its aggressive rate hikes. Instead, Powell hinted at continuing with its aggressive rate hike stance and that the Fed’s benchmark rate may require topping the level of core inflation to get complete control of surging inflation.

Powell’s comments now suggest that the Fed might push its benchmark interest rate target above 5% and then leave it there for some time for core inflation to come down to its target 2%. This means the Fed is likely to not only continue to hike rates frequently but also would go for steep hikes. Market participants are worried that the Fed will not be able to contain inflation with a soft landing of the economy. Investors remained concerned about a recession in early 2023.