What the election in Georgia means for markets

In 2016, bank shares soared, while technology stocks initially declined and lagged behind for months thereafter. Students of politics had an easy explanation: Republicans are in favor of Wall Street, while Silicon Valley is a progressive bastion.

Easy, but wrong, as the Senate vote in Georgia showed. The investor’s response to the vote in Georgia was to buy banks and sell Big Tech.

Sure, politics has shifted, and Facebook and Amazon are now being treated as bad things by many leftists. They are the biggest loser of the corporate tax cuts that President-elect Joe Biden has promised to partially reverse. The possibility of higher capital gains tax at a Democratic-controlled Senate should hit stocks that have also left investors sitting on bold, unrealized gains.

But what really matters is something common for 2016 and today: the reflection trade. The idea that the government would borrow and spend more, support the economy and bring higher inflation, and therefore less support from the Federal Reserve. It showed on Wednesday a big jump in the ten-year treasury yields which it took back above 1% for the first time since March. Another sign was a further rise in inflation expectations, already the highest since April 2019.

Higher yields help banks, just like after Trump was elected. This hurts Big Tech because profits in the future are worth less if the safe alternative is more attractive. All the FANGs – Facebook, Apple, Netflix and Alphabet (born Google) – were down, along with much smaller technology stocks.

The rest of the market shared the analysis: the cyclical stocks that are sensitive to the economy beat safer defensive stocks in general, with financial, industrial and consumer discretionary sectors. Winners were nearly 4 to 1 less than the losers in the S&P 500, but the large size of Big Tech meant that the index as a whole struggled, rising just 0.6%. The Russell 2000 Small Business Index is less dominated by such growth-oriented companies, rising 4%, even though its growth shares have declined.

This is notable where politics has a more straightforward effect. Anything related to the environment has jumped every time the prospects of the Democrats improve, as regulations and subsidies are more likely to benefit the companies. Senate control makes it easier to appoint agency heads who will push the agenda through regulations, as it cannot be filtered.

The Invesco Solar ETF is an imperfect benchmark for President Joe Biden’s election because it includes many foreign stocks, but it jumped into Georgia results and rose more than 8%. (The electric car manufacturer Tesla was up again, too, but he lives on the hopes and dreams of his shareholders, and rational explanations may not apply.)

The question is whether this is another false dawn for reflection. Investors had been expecting inflation and higher bond yields for two decades almost every year, and were mostly wrong. After the election of mr. Trump did not keep his promises to spend more on infrastructure, but rather on tax cuts on the company. It has deficits but little boost to the economy and no rise in inflation. Bank shares fell behind in 2017 with the S&P 500, while Big Tech and other growth stocks had a very successful year.

Even the conquest of both Georgia seats does not mean that Mr. Praying to the left can not hide – or that he does not want to. Every Democratic senator is required to pass on anything that Republicans reject, which means each of them has a veto. The centrist senators will certainly block everything they see as too far-fetched, including large chunks of spending in the Green New Deal trumpeted by the party’s left.

So far, the extent of the movements shows that the market does not price much of Mr. Biden’s has no control over the Senate. Substantial extra stimulus is likely to contribute to the rise in cyclical stocks, while Big Tech is likely to lag behind again.

But investors have learned a lesson over the past decade: if there is nothing specific about pushing up bond yields, cyclical and cheap value stocks, then buy bonds and Big Tech. Both are already expensive, but if Mr. Bidding does not deliver, it can easily become even more so.

Write to James Mackintosh by [email protected]