What does the choice of Georgia for the markets mean

In 2016, banking stocks soared while technology stocks initially fell and lagged behind the market for months. Politics students had an easy explanation: Republicans are betting on Wall Street, while Silicon Valley is a progressive bastion.

Easy, but wrong, as demonstrated by the Georgia Senate vote. Investors ’response to Georgia’s vote (yet to be final, but interpreted by prediction markets as safe for Democrats) was to buy banks and sell Big Tech.

Of course, the policy has changed and many on the left treat Facebook and Amazon as bad. The possibility of raising capital gains taxes should affect shares that investors have also left insured in unrealized profits.

But what really matters is something common in 2016 and today: the trade of reflection. The idea that the government will borrow and spend more, supporting the economy and contributing to higher inflation and therefore less support from the Federal Reserve. This was shown on Wednesday in a big jump in 10-year Treasury yields that brought them above 1% for the first time since March. Another sign was a further rise in inflation expectations, which were already the highest since April 2019.

Higher bond yields help banks, as they did after the Trump election. They hurt Big Tech, because the benefits in the future are worth less if the safe alternative is more attractive. All FANGs (Facebook, Apple, Netflix, and Alphabet (nee Google)) fell, along with many smaller tech stocks.

The rest of the market shared the analysis: cyclical actions sensitive to the economy outperformed safer defensive actions in general, and the financial, industrial and consumer discretionary sectors are doing well. The winners outperformed the S&P 500 losers by more than 2 to 1, but Big Tech’s large size meant the index as a whole had problems, just over 1% late in the morning. The Russell 2000 index of smaller firms is less dominated by these growth-oriented firms and jumped 3.3%, even as their stock stocks declined.

It is worth noting that politics has a more direct effect. Anything related to the environment has jumped every time Democrats ’prospects improve, because regulations and subsidies are more likely to favor businesses. Senate control facilitates the appointment of heads of agencies who will push the agenda through regulations, as they will not be able to be obstructed.

Invesco’s Solar ETF is an imperfect measure of President-elect Joe Biden’s support because it includes many foreign stocks, but jumped on Georgia’s results, rising more than 8%. (The electric car maker, Tesla, also woke up again, but lives off the hopes and dreams of its shareholders and rational explanations may not apply).

The question is whether this is another false dawn of reflection. Investors have been expecting higher inflation and bond yields almost every year for two decades and, most importantly, they have been wrong. After the Trump election, he failed to deliver on promises to spend more on infrastructure, rather than focusing on corporate tax cuts. This led to deficits, but little boost to the economy and no increase in inflation. Banking stocks lagged behind the S&P 500 in 2017, while Big Tech and other growth stocks had a very successful year.

Even assuming the market is right when Democrats win both seats in Georgia doesn’t mean Mr. Biden is able to climb to the left. It takes every Democratic senator to approve anything the Republicans reject, which means each of them has a veto, and centrist senators are sure to block everything they think goes too far, including large parts of New York spending. Green Deal, trumpeted by the left of the party.

So far, the scale of the movements shows that the market is not priced very high by Mr. Biden. A significant additional stimulus is likely to be added to the rise in cyclical stocks, while Big Tech would probably be missing.

But investors have learned a lesson from the last decade: when there is nothing specific to increase bond yields, cycles and cheap value stocks, buy bonds and buy Big Tech. Both are expensive, but if Mr. Biden fails to deliver them, they could be even easier.

Write to James Mackintosh to [email protected]