Surprise stock exchange winner in Georgia senatorial elections

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The stock market had a volatile performance on Wednesday. Initially, investors seemed dismayed by the early results of Georgia’s senatorial elections, which suggested Democrats would be able to take control of both houses of Congress. Yet market players overcame this quickly, pushing the Dow Jones Industrial Average (DJINDICES: ^ DJI) to gains of more than 600 points at its best. Even civil unrest in the nation’s capital was not enough to completely reverse the session’s rise, although the Dow Jones and S&P 500 (SNPINDEX: ^ GSPC) have completed their summits and the Nasdaq Composite (NASDAQ INDEX: ^ IXIC) actually lost ground that day.

Index

Percent change

Point change

Dow

+1.44%

+438

S&P 500

+ 0.57%

+21

Nasdaq Composite

(0.61%)

(78)

Data source: Yahoo! Finance.

The Dow has generally struggled to keep up with the performance of the Nasdaq Composite, but today it has turned things around compared to its tech counterpart. Much of the reason came from a surprise winner in the aftermath of Georgia’s Senate elections: bank stocks, which fed higher.

A big victory for the banks?

Large financial institutions have made significant gains. On the retail side, the big banks had a good day, with Wells fargo (NYSE: WFC) in the lead with an increase of 7%. Bank of America (NYSE: BAC) and Citigroup (NYSE: C) weighed with gains of around 6%, while JPMorgan Chase (NYSE: JPM) profited by a 5% jump.

The more heavily invested banks also performed well. Morgan stanley (NYSE: MS) ended the day up 6%, while Goldman Sachs (NYSE: GS) was satisfied with a 5% increase.

Image source: Getty Images.

Small regional banks have seen their stock prices rise even more in some cases. Zions Bancorp (NASDAQ: ZION) ended Wednesday up 11%, while Western Alliance (NYSE: WAL) and Fifth Third Bancorp (NASDAQ: FITB) recorded advances of 10%. Even super-regional US Bancorp (NYSE: USB) was able to join the party with an increase of 6%.

Why no one expected banks to do well

As the elections in Georgia approach, many investors were nervous on the potential for Democratic victories in the southern state. Under President Trump and his administration, regulation of the financial sector has eased over the past four years. Market participants saw the potential of a divided government on Capitol Hill as a positive for bank stocks, as a Republican Senate would be able to block Democratic attempts to pass tougher restrictions on banking practices.

Still, it turned out that the news from Georgia didn’t have the impact many had anticipated. Rather than worrying about regulation, investors in bank stocks have focused on two areas in which Democratic control of Washington could lead to better results for their business. First, in the immediate future, the possibility of the federal government providing larger stimulus checks to millions of Americans would help support the banks. Additional checks would likely increase people’s bank account balances and increase bank profits.

Additionally, the bond market believes Democrats are more likely to encourage increased government spending overall, and Treasury yields have risen as a result. Higher bond yields mean greater profit potential for banks from lending, especially when paired with short-term rates that are likely to stay near zero for the foreseeable future.

The effect of policy on stocks is not always clear

Today’s surprise move in bank stocks simply shows that trying to predict market movements based on policy outcomes is fraught with pitfalls. Even if you can guess how the voters will decide, you can still be wrong about the consequences. It’s easier to focus only on the big companies that will thrive, no matter who is in office.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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