Midterm Outcome And FTX's Demise: An Unexpected Turn Of Events

What a week it’s been.

First, the midterm elections failed to produce the “red wave” that most pollsters and pundits predicted, and as I write this, it’s still unclear which party will have control of the House and Senate next year.

And second, the crypto industry may have experienced its very own Lehman Brothers moment.

FTX, until recently the world’s second-largest crypto exchange, filed for bankruptcy as its embattled founder, Sam Bankman-Fried, stepped down as CEO following a liquidity crunch that exposed the firm’s improper use of customer assets. FTX’s shocking demise comes within months of the collapse of Terra’s Luna coin, which triggered the bankruptcies of crypto firms Celsius Network, Voyager Digital and Three Arrows Capital.

The question on many investors’ minds is: How far and for how long will the contagion spread?

Biggest Midterm Upset In Decades?

It’s common knowledge that midterm results have not always been kind to the incumbent president. President Barack Obama’s agenda was famously sidelined by a Tea Party “shellacking” in 2010, and Republicans lost control of Congress midway through President Donald Trump’s term.

It’s also a given that past performance does not guarantee future results. As former Secretary of the Treasury Larry Summers tweeted on Wednesday, the last Democratic president to have such a favorable midterm outcome as Joe Biden did was John F. Kennedy, in 1962.

To be clear, the GOP may end up winning back a (very narrow) majority in one or both chambers of Congress once every vote is counted, but the victory, if we can call it that, is a Pyrrhic victory. In many contests across the U.S., voters rejected the most extreme forms of Trumpism, putting the former president’s 2024 ambitions into question.

Wall Street Loves Washington Gridlock

The big winner of the election was Wall Street. As I’ve pointed out before, legislative gridlock has historically been constructive for stocks, since sweeping policy changes become unlikely and there’s less risk to individual sectors.