Stocks and index ETFs are gaining for a second consecutive day Wednesday as investors vigilantly monitor the two runoff elections in Georgia that will establish control of the Senate.
The Dow Jones Industrial Average rallied 1.7%, pegging an all-time intraday high, while the S&P 500 popped 1.1% to notch a record as well. The Nasdaq Composite is treading water meanwhile, after dropping over 1%, dragged down by Big Tech names like Amazon and Microsoft.
Major stock ETFs are also breaking to higher ground on Wednesday as investors weigh the runoff election possibilities. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are all advancing just before noon EST.
Currently, the Democrats are favorites to win the Georgia Senate race. Democrat Raphael Warnock is predicted to win the runoff against incumbent Republican Kelly Loeffler, while, Democrat Jon Ossoff was leading Republican Sen. David Perdue, but NBC said the race was too close to call.
If both Democrats win, Senate control could fall to the Democrats, marking a shift of power, something that many Wall Street pundits believe could result in higher corporate taxes and tougher regulations on companies. This could be tough on tech companies and their stocks, which could drive down ETFs like the Fidelity MSCI Information Technology Index ETF (FTEC), which is falling slightly amid the concerns Wednesday.
“In the immediate term, markets are pricing in more stimulus. From an equity standpoint, that means tech underperformance and cyclical/value outperformance,” Tom Essaye, founder of Sevens Report, said in a note. “The biggest takeaway from the Democrats win is more power behind the cyclical/value/higher rates trade.”
A Democratic win is also a boon for certain stocks like airlines and travel, which could benefit from more stimulus. Goldman Sachs projects another big stimulus package that could approach $600 billion in the near term if Democrats are successful in taking the Senate.
Aiding An Agenda
ETFs that could be specifically supported by a Democrat agenda rallied as well. The Invesco Solar ETF (TAN) rose 7.7%.
“I think there’s an expectation … that there’s going to be a lot more spending,” Jason Trennert, chairman of Strategas, said on CNBC’s “Squawk Box” on Wednesday. “You have to remember the House, the initial offer on the table after we passed three fiscal stimulus measures was $3 trillion we’ve had it down to 900 billion but if the Democrats were to pick up two seats, there’s no question in my mind that later this year there would be a sense that more spending is needed.”
But analysts warn investors that a drop could be coming for stocks.
“Once the market digests this result, a pullback would not shock us at all, as at these levels the market is not pricing in tougher regulation, substantially higher rates, or an earnings headwind, and the chances of all three went up overnight,” Essaye said.
In the end, analysts are optimistic about the outcome of the election on markets.
Tom Lee, head of research at Fundstrat Global Advisors, said in a note to clients, “I don’t know the future, but to me, the ‘uncertainty’ of the election is arguably a bigger overhang than the actual outcome.”
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