What does the Georgia election mean?


Politics often matters to investors, but the way it matters is not always clear.

Compare the market’s reaction to Donald Trump’s winning the White House in 2016 and the immediate reaction to the possibility of a Democrat twin-win in Georgia, which gives the party control of the Senate (bus).

In 2016, bank stocks rose, while technology stocks initially fell and then lagged behind the market for months. Students of politics had an easy explanation: Republicans favor Wall Street, while Silicon Valley is a progressive stronghold.

Georgia Senate as easy to vote, but wrong. The investor response to the Georgia vote was to buy banks and sell to Big Tech.

Sure, politics has changed, and Facebook and Amazon are now considered villains by many on the left. Those would be the biggest losses from the corporate-tax cuts that President-Elect Joe Biden has promised to partially reverse. The possibility of higher capital-gain taxes with a Democratic-controlled Senate should kill stocks that have left investors sitting on fat unrealized gains.

But what really matters is something in common for 2016 and today: vengeance trading. The idea that the government would borrow and spend would support the economy and bring high inflation, and so little Federal Reserve support. Wednesday saw a big jump in 10-year Treasury yields, taking them above 1% for the first time since March. Another sign was another increase in inflation expectations, already their highest since April 2019.

High bond yields help banks after Mr. Trump is elected. They hurt Big Tech, as future profits are lower if the safer option is more attractive. All FANGs — Facebook, Apple, Netflix and Alphabet (nee Google) —with many small stock stocks.

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The rest of the market shared the analysis: Economy-sensitive cyclical stocks beat normally defensive stocks, all doing well in the financial, industrial and consumer-discretionary sectors. The Gainers outscored the losers by about 4 to 1 in the S&P 500, but Big Tech’s sheer size meant that the index rose only 0.6%, with the entire struggle taking place. Such growth-oriented companies are less dominated in the Russell 2000 index of smaller companies, and jumped 4% even after its growth stock fell.

It is worth noting that where politics has a more direct effect. Anything related to the environment has improved Democrats’ chances every time, as regulations and subsidies are more likely to favor companies. Control over the Senate makes it easier to appoint agency heads who will advance the agenda through regulations, as they cannot be filmed.

Democrat Rafael Warnock won the election of Georgia runoff for the US Senate.


Photo:

Mike Seger / Reuters

The Invesco Solar ETF is an incomplete measure of President-Elect Joe Biden’s support because it contains a lot of foreign stock, but it bounced over Georgia results, rising more than 8%. (Electric-carmaker Tesla was up again, but it lives on the hopes and dreams of its shareholders and rational explanations may not apply.)

The question is whether this is yet another false dawn. Investors have expected inflation and high bonds to yield very high yields for two decades per year, and have been mostly inaccurate. After Mr. Trump’s election, he failed to deliver on the promise of spending more on infrastructure than focusing on corporate tax cuts. This reduced the deficit but gave a slight boost to the economy and there was no increase in inflation. The bank’s shares lagged behind the S&P 500 during 2017, while Big Tech and other growth stocks were wildly successful.

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Even winning both of Georgia’s seats does not mean that Mr. Biden will lean to the left or he wants to. Every Democratic senator needs to pass anything to deny Republicans, meaning they each have a veto. Centrist senators are sure to block anything they are going too far, including the bulk of spending in the Green New Deal with trumpets on the party’s left.

So far, the scale of the move suggests that the market does not price much beyond Mr. Biden’s control of the Senate. Significant additional stimulus would be likely to add to the rally in cyclical stocks, while Big Tech would be likely to lag again.

But investors have learned a lesson from the past decade: buy bonds and big techs when there is nothing special to raise bond yields, cyclicals and cheap value stocks. Both are already expensive, but if Mr. Biden fails to deliver, they can easily become even more.

Democratic candidate Rafael Warnock is the first black American to represent Georgia in the Senate, as the AP declared him the winner of the close runoff election of Republican Sen. Kelly Loeffler. Which party will control the chamber is still to be determined. Photo: Rafael Warnock / YouTube

Write James Mackintosh on [email protected]

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