Following Tuesday's midterm election results, which saw Democrats win majorities in both houses of Congress, markets rebounded from a 2-day dip and by Wednesday the S&P 500 closed 1.5% higher on the week. On Thursday, however, the tide shifted and the S&P 500 fell by 4.4%—its worst day since April of 2025. While the market closed slightly higher on Friday, we want to unpack what made Thursday so bad and what it means for investors going into next week.
While the midterms made headlines for the week, the markets were most likely focused on local elections, where public hostility towards the buildout of AI infrastructure was palpable. Across the country, 46 ballot initiatives were passed to curb the construction of data centers in local communities. Additionally, the election of candidates who supported similar moratoriums have cast doubt on the near-term demand for chips and likely drove Thursday's selloff in technology.
However drastic the pulldown on Thursday was, the S&P 500 is still technically being supported by lower lows established in June and July. The 20-day moving average crossing below the 50-day moving average can spell trouble ahead. As a result, a more defensive position can be an opportune strategy as the market tests support on the 200-day moving average.
Recent rotation between sectors also suggests that investors are taking off risk in the tech-heavy market. Traditionally, consumer staple stocks outperform the S&P 500 when the market is entering into a downtrend. The recent jump in this relationship supports our view that a more defensive position makes sense right now.
On the whole, the outlook for the market is relatively uncertain as several layers of support have been broken. As investors continue to shift, we anticipate taking further action to defend against losses. Should the market continue to drift downward, the question moves from looking for an exit to looking for an entrance. Historically, the speed of the downtrend can match the speed of the rebound and investors don't want to sit on the sidelines for too long and possibly miss out on market gains.
This material is for informational purposes only and is not intended as investment, tax, or legal advice. Past performance is not indicative of future results.
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