Investors piled into shares of economically sensitive companies and dumped big technology stocks and U.S. Treasurys Wednesday, betting on a big boost in government spending under a Democratic-controlled Senate.
The Dow Jones Industrial Average, composed mostly of cyclical stocks, jumped 437.80 points, or 1.4%, to 30829.40, led by shares of banks and manufacturers that have been beaten down during the pandemic. The yield on the 10-year U.S. Treasury note soared above 1% for the first time since March as investors dumped government bonds in anticipation of more government borrowing and higher growth and inflation. Meanwhile, gold fell 2.3%, the biggest one-day loss since early November, as investors retreated from the haven asset.
Before the incident at the Capitol, the Dow had risen as much as 631 points, briefly crossing 31000 for the first time
“The market is pricing in all the good news and optimism around a growth rebound,” said Priya Misra, head of global rates strategy at TD Securities in New York. Investors were already feeling better about the outlook thanks to coronavirus vaccines and now are likely to get even more growth-friendly deficit spending than they had bargained for, she said.
The sudden move into underperforming assets Wednesday came as investors digested the results from Tuesday’s Senate runoff elections in Georgia. Democrat Raphael Warnock defeated incumbent Kelly Loeffler in one of the Georgia runoffs. The other race was called for Democrat Jon Ossoff shortly after the stock market closed.
Going into January, many traders had anticipated that the investment landscape in 2021 would largely be an extension of the year before. Despite the looming Georgia election, most had expected Republicans to maintain control of the Senate, putting a check on the agenda of the incoming Democratic administration. Swelling Covid-19 cases, too, meant many Americans would remain stuck at home.
Investors assumed that both scenarios, along with a low-growth environment, would fuel growth stocks—particularly technology companies—to new heights.
But the unexpected results from Tuesday’s election upended markets, sending investors flocking to shares of banks, industrial companies and other cyclical groups that are poised to benefit from further stimulus. Goldman Sachs and Caterpillar jumped more than 5%, while the Russell 2000 index of small-cap stocks surged 4%.
Meanwhile, the S&P 500 rose 21.28 points, or 0.6%, to 3748.14. The tech-heavy Nasdaq Composite lost 78.17 points, or 0.6%, to 12740.79. Big tech stocks, including Apple, Microsoft and Amazon.com declined more than 2% as investors worried that a Democratic-controlled Congress would lead to higher taxes and tighter regulations.
The yield on the benchmark 10-year U.S. Treasury note settled at 1.041%, according to Tradeweb, compared with 0.955% Tuesday.
Worries about the pressure on big tech stocks appeared to ease as the day progressed, with some investors and analysts saying they don’t expect policy changes to be imminent. Even if Democrats take control of both Senate seats in Georgia, some said, moderate-leaning Democrats may act as a check on a more progressive agenda.
“With a potential razor-thin majority, drastic change is unlikely,” said Jeffrey Buchbinder, equity strategist at LPL Financial.
With both Democratic candidates emerging victorious from Tuesday’s election, they will have the majority in a 50-50 Senate as Vice President-elect Kamala Harris will break any ties.
Since the weeks preceding November’s election, analysts and investors have largely been undecided about which scenario—a divided government or a “blue wave”—would benefit markets. Heading into the November election, traders had expected Democrats to win control of the White House and Senate, fueling wagers on cyclical stocks such as smaller companies.
Those bets had also helped lift bond yields from near-record lows, as investors anticipated more government spending that would increase the supply of government bonds and boost inflation, both of which tend to weigh on bond prices.
When Democrats initially appeared to fall short in their attempt to win the Senate, many of those trades unwound. Investors then rallied behind the benefits of a divided government—including less regulation and lower chances of tax reform.
But now, some investors said, the projected blue wave offers investors renewed changes to move into shares of companies that have yet to be picked over as the stock market has recovered from pandemic-induced lows.
Christopher Harvey, head of equity strategy at Wells Fargo Securities, said he is looking for opportunities in the energy sector after picking up shares of small-cap companies, as well as some financial and industrial stocks, last year. He said he now expects cyclical stocks to continue to move sharply higher.
“Our thought process is this is going to be very aggressive and very concentrated,” Mr. Harvey said. The move into cyclical stocks will not be “as long as we initially thought. [Traders] are going to have to be nimble and opportunistic.”
In commodity markets, U.S. crude rose 1.40% to $50.63 a barrel, the highest settle value since February.
And in overseas markets, European stocks rose, with the Stoxx Europe 600 up 1.4%. Stocks in Asia ended the day mostly lower. Japan’s Nikkei 225 fell 0.4%, while South Korea’s Kospi fell 0.7%. In Hong Kong, the Hang Seng was up 0.2% while China’s Shanghai Composite rose 0.6%.
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