Stocks rise on Wall Street ahead of election, inflation data

People walk past the New York Stock Exchange on Wednesday, June 29, 2022 in New York. Stocks are opening lower across the board on Wall Street, Tuesday, July 5, and crude oil prices are dropping again. Treasury yields also fell as traders continued to worry about the state of the economy (AP Photo/Julia Nikhinson)

NEW YORK (AP) — Stocks rose in afternoon trading on Wall Street Tuesday as Americans head to the polls to vote in midterm elections that are being heavily influenced by inflation and the threat of a recession.

The S&P 500 rose 1.3% as of 12:13 p.m. Eastern. The Dow Jones Industrial Average rose 517 points, or 1.6% to 33,341 and the Nasdaq rose 1.5%.

Bond yields fell. The yield on the 10-year Treasury slipped to 4.15% from 4.22% late Monday.

The elections taking place in the U.S. could leave the government split between Democrats and Republicans, which could be positive for markets. A divided government would likely bring gridlock rather than big, sweeping policy changes that could upset tax and spending plans. Historically, when a Democratic White House has shared power with a split or Republican Congress, stocks have seen stronger gains than usual.

Analysts say a strong performance by Democrats in the elections could lead to increased spending to help the economy that might fuel inflation, which is currently the highest in four decades. Wall Street will get more data on inflation later in the week with the government's October report on consumer prices.

Inflation and the Federal Reserve's aggressive interest rate increases remain the big concerns for Wall Street. The central bank is trying to slow economic growth to cool inflation, but the strategy risks going too far and bringing on a recession.

“It will continue to be front and center until we are out of the woods from this high inflationary environment,” said Bill Merz, head of capital market research at U.S. Bank Wealth Management. “The Fed doesn’t even know how far they need to go, certainly nobody else does.”

Even though the Fed has said that it may soon pare back the size of its increases, it is still warning markets that it may ultimately hike rates higher than expected because of just how stubborn high inflation has been. The Fed has already hiked its key overnight rate to a range of 3.75% to 4%, up from virtually zero in March, and more investors are expecting it to top 5% next year.

Wall Street is looking for signs that those rate increases are helping to cool inflation. Economists expect a report on Thursday to show the consumer price index rose 8% in October from a year earlier, slightly lower than September’s 8.2% inflation rate. Investors hope that a fourth straight month of moderating inflation from June’s peak of 9.1% could give the Fed leeway to loosen up a bit after raising interest rates at a furious pace this year.

A hotter-than-expected reading could dash hopes that inflation is easing and signal that the Fed will have to remain aggressive for a longer period of time to tame high prices.

“The point though, is how long does it take to get back to a more normal inflation rate and the longer it takes, the more restrictive the Fed is compelled to be,” Merz said.

Investors are also occupied with corporate earnings. Take-Two Interactive fell about 9.7% after reporting weak financial results. TripAdvisor slumped 17.8% after its third-quarter earnings fell short of Wall Street forecasts.

Outside of earnings, Kohl's jumped 10.8% after announcing that CEO Michelle Gass is stepping down from her role early next month and will become the president of Levi Strauss & Co. The department store has been under pressure by activist investors to shake up management amid weak sales.