January 19, 2021
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What the Georgia Election Means for Markets

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Investors’ immediate response to the Georgia vote was to buy banks and sell Big Tech.

Investors’ immediate response to the Georgia vote was to buy banks and sell Big Tech.

Photo: virginie kippelen/Agence France-Presse/Getty Images

Politics often matters to investors, but the way it matters isn’t always obvious.

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

In 2016, bank stocks soared 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 bastion.

Easy, but wrong, as the Georgia Senate vote showed. The investor response to the Georgia vote (yet to be final, but interpreted by prediction markets as a sure thing for the Democrats) was to buy banks and sell Big Tech.

Sure, politics has shifted, and
Facebook
and
Amazon
are now treated as baddies by many on the left. The possibility of higher capital-gains taxes should hit stocks that have left investors sitting on fat unrealized profits, too.

But what really matters is something common to 2016 and today: the reflation trade. The idea that the government will borrow and spend more, supporting the economy and bringing higher inflation, and so less Federal Reserve support. That showed up Wednesday in a big jump in 10-year Treasury yields that took them back above 1% for the first time since March. Another sign was a further rise in inflation expectations, already their highest since April 2019.

Higher bond yields help banks, just as they did after Mr. Trump was elected. They hurt Big Tech, because profits far in the future are worth less if the safe alternative is more appealing. All of the FANGs—Facebook, Apple,
Netflix
and Alphabet (nee Google)—were down, along with many smaller tech stocks.

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The rest of the market shared the analysis: The cyclical stocks sensitive to the economy beat safer defensive stocks in general, with financials, industrials and consumer-discretionary sectors all doing well. Gainers outnumbered losers in the S&P 500 by more than 2 to 1, but the sheer size of Big Tech meant the index as a whole struggled, up a bit over 1% by late morning. The Russell 2000 index of smaller companies is less dominated by such growth-oriented companies, and jumped 3.3% even as its growth stocks fell.

It is worth noting where politics has a more straightforward effect. Anything environmentally related has jumped every time the Democrats’ prospects improve, because regulations and subsidies become more likely to favor the companies. Control of the Senate makes it easier to appoint agency heads who will push the agenda through regulations since they can’t be filibustered.

Democrat Raphael Warnock won a Georgia runoff election for the U.S. Senate.

Democrat Raphael Warnock won a Georgia runoff election for the U.S. Senate.

Photo: mike segar/Reuters

The
Invesco Solar ETF
is an imperfect measure of President-elect Joe Biden’s support because it includes lots of foreign stocks, but it leapt on the Georgia results, rising more than 8%. (Electric-car maker Tesla was up again, too, but it lives on the hopes and dreams of its shareholders and rational explanations might not apply.)

The question is whether this is yet another false dawn for reflation. Investors have expected inflation and higher bond yields pretty much every year for two decades, and mostly been wrong. After Mr. Trump’s election, he failed to deliver on promises to spend more on infrastructure, instead focusing on corporate tax cuts. That brought deficits but little boost to the economy and no rise in inflation. Bank stocks lagged behind the S&P 500 during 2017, while Big Tech and other growth stocks had a wildly successful year.

Even assuming the market is right about the Democrats winning both Georgia seats, it doesn’t mean Mr. Biden will be able to lurch to the left. Every Democratic senator is needed to pass anything Republicans reject, which means each of them have a veto—and the centrist senators are sure to block anything they see as going too far, including large parts of the spending in the Green New Deal trumpeted by the left of the party.

So far, the scale of the moves shows the market isn’t pricing in much from Mr. Biden. Significant extra stimulus would be likely to add to the rally in cyclical stocks, while Big Tech would probably miss out.

But investors have learned a lesson from the past decade: When there is nothing specific to push up bond yields, cyclicals and cheap value stocks, buy bonds and buy Big Tech. Both are expensive, but if Mr. Biden fails to deliver, they could easily become even more so.

Related Video

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

The Wall Street Journal Interactive Edition

Write to James Mackintosh at James.Mackintosh@wsj.com