Investors should stay bullish on equities ahead of this week's U.S. midterm elections, according to Morgan Stanley's Michael Wilson, the top-ranked strategist who correctly predicted this year's slump in stocks.
Polls pointing to Republicans winning at least one chamber of Congress provide a potential catalyst for lower bond yields and higher equity prices, which would be enough to keep the bear-market rally going, Wilson wrote in a note Monday.
Americans head to the polls on Tuesday to decide control of both chambers of Congress, the governorship in 36 states, and countless other local races and ballot initiatives.
A "clean sweep" by the Republicans could greatly increase the chance of fiscal spending being frozen and historically high budget deficits being reduced, fueling a rally in 10-year Treasuries that can keep the equity market rising, Wilson said.
This week is also significant for markets as a U.S. consumer-price index reading on Thursday will show if Federal Reserve rate hikes are cooling inflation.
The central bank increased rates by 75 basis points for a fourth time in a row last week and Chair Jerome Powell said the cost of borrowing will be higher than previously expected. That put a spanner in the works of the recent rally, with the S&P 500 Index posting its worst week since September.
Wilson and his team said short-term volatility should be expected ahead of the midterm results, especially given anxiety around the consumer prices release.
