In the aftermath of the US presidential and other elections in November, pundits opined that the best possible result for investment markets was a divided house – one where the New Democratic Party president would be kept in check by a Republican Party-controlled Senate. Now that the Democrats are poised to win both this week’s run-off elections and gain control of all three governance arms, suddenly the “experts” are singing from a different hymn sheet. As our partners at The Wall Street Journal report, investment markets are now celebrating the delayed clean sweep by Joe Biden’s party. Seems everyone, including investors, has had enough of divisions sowed during the last four years. – Alec Hogg
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Investors learn to love unified government
Market reaction to Georgia runoff shows that partisan division in Washington is no longer good for stocks
Updated Jan. 6, 2021 4:59 pm ET
The old cliché that investors prefer divided government is in need of an update.
Stocks rallied Wednesday after Democrats won one Georgia Senate seat and were poised to take another, though trading ended before the second race was called, delivering control of the Senate to the Democrats. This goes against the conventional wisdom that stocks do best when at least one chamber of Congress is controlled by the party in opposition to the president, preventing any dramatic or radical moves that could unsettle markets.
The S&P 500 ended Wednesday up 0.6% and the Dow Jones Industrial Average rose 1.4% to a new closing high, though that was off the levels it reached earlier in the day before Washington D.C. descended into violence. Perhaps most notably, yields on 10-year U.S. Treasurys rose by .075 points to 1.03%, reflecting higher growth expectations. This gave a boost to banks and other financials, as it will allow them to earn more on loans and investments. Bank of America and Wells Fargo, two of the country’s largest lenders, soared 6.3% and 7.1%, respectively. All this was in spite of the chaos in the nation’s capital.
The tech-heavy Nasdaq Composite, however, ended the day down 0.6%. Some high-flying technology companies seen as pandemic beneficiaries were among Wednesday’s losers: Etsy fell 4.2% and Peloton declined 3.2%.
In past decades, divided government might have meant moderation and compromise in policy-making. In 2021, though, it would likely mean paralysis, which isn’t what the U.S. economy needs right now. Look no further than the prolonged negotiations over a second coronavirus-relief package, which eventually yielded a smaller-than-expected sum that came too late to save many struggling businesses as the economy entered a bleak winter.
A Democratic-controlled Senate likely means that more fiscal stimulus is on the way, not just in the form of checks to individuals but also infrastructure spending, investments in green energy and aid to cash-strapped local governments. No wonder interest rates are ticking higher.
