Investors piled into shares of economically sensitive companies and dumped big technology stocks Wednesday, betting Democrats are poised to take control of the Senate and usher in another round of stimulus.
The Dow Jones Industrial Average, composed mostly of cyclical stocks, jumped about 400 points, or 1.3%, in recent trading, led by shares of banks and manufacturers. The yield on the benchmark 10-year U.S. Treasury note rose above 1% for the first time since March. Gold prices fell 2.3%–their biggest one-day loss since early November.
Earlier in the afternoon, the Dow had surged more than 600 points, briefly crossing the 31000 threshold for the first time on record. The index fell from hits highs as the U.S. Capitol was placed on lockdown Wednesday afternoon and multiple congressional buildings were evacuated amid protests outside, several news agencies reported.
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. Both scenarios, investors assumed, would fuel growth stocks—and particularly technology companies—to new heights.
That sentiment shifted Wednesday on projections that both Georgia Senate seats would end up in Democratic hands. Investors scooped up shares of banks, industrial companies and other cyclical groups that are poised to benefit from further stimulus. Goldman Sachs and Caterpillar rose more than 6%.
The S&P 500 rose 0.6%. Meanwhile, the tech-heavy Nasdaq Composite lost 0.4%, paring some of its step early-morning losses, as some investors worried that a Democrat-controlled Congress would lead to higher taxes and tighter regulations on tech giants.
Those concerns seemed to fade, however, as the day progressed, with some investors and analysts saying that they don’t expect policy changes to be imminent. Plus, some said, even if Democrats take control of both Senate seats in Georgia, 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.
Control of the Senate will be decided based on the two runoff elections in Georgia. The Democrats flipped one Republican seat and maintained a narrow lead in the second race, which was too close to call. If both Democratic candidates win, they will have the majority in a 50-50 Senate as Vice President-elect Kamala Harris will break any ties.
A change of control in the Senate is seen by some as a catalyst that could shift the types of stocks favored by investors away from those that dominated last year’s rally. Big tech companies were among the losers: Facebook fell 1.9% and Apple lost 1.2%, while Microsoft and Google’s parent Alphabet tumbled 1% and 0.5%, respectively.
The Russell 2000, which tracks smaller stocks, jumped 5%.
Meanwhile, in bond markets, the yield on the 10-year Treasury rose to 1.058%, from 0.955% on Tuesday.
A Democratic-controlled Washington would also boost the possibility of more fiscal stimulus, said Seema Shah, chief strategist at Principal Global Investors. That will help lift government-bond yields, which track expectations for growth and inflation. More government spending supports stocks hit hardest by the pandemic, such as airlines and car companies.
But with Democratic control of the Senate likely to be razor thin, the legislative agenda would be tempered, she said.
“Once the clouds have cleared, the market will realize that, yes, this is a blue sweep but it is a very, very marginal one,” she said. “It is certainly not the status quo we have been used to, but I also wouldn’t expect that much of a change.”
In overseas markets, European stocks rose, with the Stoxx Europe 600 up 1.4%.
In commodity markets, Brent crude, the international benchmark for oil, rose 1.9% to $54.60 barrel. Gold prices fell 2.3% to $1910.70 a troy ounce.
In Asia, stock markets were 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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