Blue Wave Washes Over Wall Street

Sandhya Anand, Staff Writer

Holding power for one term seems to be becoming a running theme for the Republicans. As rioters and white supremacists storm the Capitol, how will the stock market react to such unprecedented times?

On January 6th 2021, Democrats Jon Ossoff and Raphael Warwock led Georgia to a blue victory in their special election for the Senate, concluding in President-elect Joe Biden having control over both houses of the United States Government. It was a historical win, with Reverend Warnock being the first African-American to win a Senate seat in Georgia, and Ossof becoming the youngest person to become a senator in the last four decades at 33 years old. 

The US stock market closed the day 0.6 percent higher. Higher chances of receiving a bigger stimulus package led to a rise in treasury yields. The World Bank is expecting a 3.5 per cent expansion after the 3.6 contraction of last year. 

“A sweep for the Democrats will probably lead to additional stimulus measures that would likely boost short term economic growth,” stated Steve Chiavarone,a portfolio manager at Federated Hermes. 

This win would also support the idea of owning businesses in sectors such as banking, energy and industrials, which would likely benefit from the growth forecasted for the upcoming year. The increase in demand for US treasuries would also boost the commodities and emerging markets, which would actually benefit from a weaker value of the US dollar, if increasing inflation erodes the value of global reserve currency. Concurrently, this inflation may drive down the demand for US treasuries.

The 10 year yields hit an astounding 1 percent after nine months of being traded below that. The yields then rose 0.06 points to 1.02 per cent in early Asian trading and then concluded at 1.04 per cent. Yields tend to rise when bond prices fall. The bond market expects more sales of debt to fund the stimulus package announced by Biden, the value of which goes alongside the $900bn package passed in last December. Goldman Sachs Economists expect the Senate to pass an additional 600bn stimulus package followed by increases in spending and tax increases. 

“Higher growth could also push longer-term interest rates higher- something that is good for financials, but bad for bonds as well as interest rate-sensitive sectors,” continued Mr Chiavarone. 

On the other hand, some have feared this very win. ETF holders, who enjoyed the post election market rally might face a significant hit due to the Democratic majority. They believe that the party may revoke the capital gains tax exemption that currently gives ETF’s a significant advantage over mutual funds.

Senior portfolio manager at Exencial Wealth Advisors, Jon Burckett-St Laurent, stated that he took that risk quite seriously as the discovery of unrecognised capital gains and potential tax increases would create a huge “headwind for the markets” 

David Bahsen, chief investment officer of the Bahsen group, stated that “overall value type stocks,” will perform with stronger growth. Relatively, plain growth stocks are less likely to see benefits from stimulus spending. It is unlikely that more support will continue to arrive from the government. There only hopes for a stronger economy to hold up long term rely on the quick and efficient distributions of the COVID-19 vaccinations. 

Photo by Louis Velazquez, Unsplash

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