Stocks Fall Amid Unclear Midterm Outcome and Crypto Meltdown

Stocks dropped on Wednesday, after expectations of a “red wave,” in which Republicans would comprehensively win control the House and potentially also gain a majority in the Senate, failed to materialize in the midterm elections.

The S&P 500 fell 2.1 percent, with every sector of the index in the red, though the election was not the only thing affecting markets on Wednesday, with turmoil in crypto markets, among other things, also dragging stocks lower, investors said.

Overall control of the House and Senate remained uncertain, with votes still being counted. And it may take days to get a clear picture of the result. According to the most recent projections, Republicans are favored to win control of the House while the Senate is leaning toward the Democrats.

After nudging higher on Tuesday evening, coinciding with early Republican victories, markets grew more cautious as the night went on, opening on Wednesday with every sector in the red.

“The result represents a disappointing outcome for Republicans, who expected to garner a large majority of seats in the House but now must manage the flow of legislation with less room for error,” said Thomas McLoughlin, head of fixed income and municipal securities at UBS Global Wealth Management.

Some investors cautioned against reading too much into the early stock moves, with Republicans still expected to dent Democrats’ control. “I think the immediate sell-off can probably be attributed more to reflexive selling of the news rather than something worse,” said Brad McMillan, the chief investment officer at Commonwealth Financial Network.

Investors and analysts have said that divided government — where Democrats lose control of at least one chamber of Congress — could be positive for the stock market because it would probably limit any major legislation that could affect corporate profitability and financial markets.

“You just have politicians stop doing stuff and generally the market likes that,” said James Masserio, the co-head of equities in the Americas for Société Générale.

However, the election is not the only thing on investors’ minds. Many have said that against a backdrop of high inflation, rising interest rates and tense geopolitics, the midterms have receded in importance.

On Wednesday, shock waves rippled through the cryptocurrency industry after a deal to save one of the largest, and thought to be most stable, exchanges unraveled.

FTX, the crypto exchange set up by the industry pioneer Sam Bankman-Fried, came under a deluge of withdrawals earlier in the week after its larger rival Binance said it would sell all of its holdings of FTT, a token that FTX had invented to ease trading on its platform.

Binance then agreed to bailout its smaller rival on Tuesday after the company came close to collapse. But by Wednesday afternoon the deal had fallen apart.

The price of Bitcoin fell 13 percent on Wednesday, to around $16,000, and was down over 20 percent since the start of the week, with traders saying this also weighed on the broader stock market. Mr. Bankman-Fried’s personal fortune fell precipitously from around $16 billion to less than $1 billion, according to a Bloomberg wealth index.

Also on Wednesday, Tesla slumped over 7 percent after regulatory filings revealed its chief executive Elon Musk sold nearly $4 billion of the company’s stock over three days this month.

The next big event for investors comes on Thursday, when new data about inflation in the United States will steer expectations over how aggressively the Federal Reserve could be in raising interest rates, which increases costs for companies and dampens economic growth.

“There are these major forces that kind of drown out the election,” Mr. Masserio said.