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Dow rises, but tech stocks slip as ‘reflation trade’ grips Wall Street after Democrats flip Senate seat

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U.S. stocks mostly shook off early losses to trade higher Wednesday, though technology sector stocks remained lower, after Democrats scored at least one U.S. Senate seat in run-off elections in Georgia Tuesday, bringing the possibility of regulation and higher corporate taxes.

How are stock benchmarks performing?
  • The Dow Jones Industrial Average
    DJIA,
    +1.27%

    traded about 306 points, 1%, higher, near 30,698

  • The S&P 500 index
    SPX,
    +0.74%

    gained about 18 points, 0.5%, to trade near 3,744

  • The Nasdaq Composite index
    COMP,
    -0.04%

    was 50 points lower, down 0.4% near 12,768

  • The small-cap Russell 2000
    RUT,
    +2.49%

    gained 2% to about 2,018.

On Tuesday, stocks finished higher:

  • The Dow rose 167.71 points, or 0.6%, to 30,391.60

  • The S&P 500 added 26.21 points, or 0.7%, to 3,726.86

  • The Nasdaq Composite Index gained 120.51 points, or 1%, to trade at 12,818.96.

  • The Russell 2000 index
    RUT,
    +2.49%

     rose 1.8%.

What’s driving the market?

Politics was dictating trading action Wednesday after two key runoff elections for U.S. Senate seats in Georgia roiled parts of the market. Democrats were one step closer to control of both houses of Congress, improving chances that President-elect Joe Biden may be able to implement his legislative agenda.

Democrat Raphael Warnock defeated incumbent Republican Kelly Loeffler for one U.S. Senate seat and Democrat Jon Ossoff held a narrow lead over Republican Sen. David Perdue in the other race, according to the Associated Press.

A Democratic sweep of both seats in Georgia would give the party control of the Senate as Vice President—elect Kamala Harris would cast tiebreaking votes as the chamber’s president.

Technology stocks
XLK,
-0.58%

were under pressure though Wednesday on expectations that a Democrat-controlled Congress would lead to higher taxes and tighter regulations of internet based businesses.

U.S. bond yields were also rising, weighing on the broader market, as fixed-income investors wager that a “Blue Wave” in Washington would increase government spending to combat COVID-19’s impact on the economy.

Tech stocks have roared higher in the past year partly because the low interest rate environment that helps justify owning pricier stocks that don’t pay rich dividends, but the 10-year Treasury note early Wednesday climbed over 1%, near its highest since March.

Still, some of the pessimism over the sector may be misplaced, said Paul Nolte, portfolio manager at Kingsview Investment Management. “If technology’s doing really well, we’re worried about the virus. If technology is not doing well, we’re more excited about re-opening,” Nolte said in an interview. “Today small-cap stocks, international stocks, even the yield curve is indicating more economic growth.”

“We’re expecting more of a reflationary trade in general,” Nolte said, “with growth taking a back seat to everything else. The fourth quarter was a taste of that and I think that will continue in fits and starts. We do expect a back-and-forth as we figure out how the economy opens and how much fiscal stimulus actually helps.”

The balance of power in the Senate is now in Democrats’ favor, “which leads naturally to the assumption that there will be another slug of fiscal stimulus to come early this year,” wrote Aegon Asset Management’s fixed-income manager Nick Chatters in a Wednesday note.

But it’s important to keep some perspective on bond yields, Chatters added, noting that the central bank will likely help keep yields in check.

“Whilst it is interesting to talk about fiscal stimulus, and this is important for growth, the main driver of government yields remains the policy rate,” Chatters said. “The channel to higher policy rates is via employment and inflation in the US, and this channel has long and uncertain lags. So, for treasuries, this is important, but not as important as the Fed.”

Bank stocks
XLF,
+3.83%

were rising Wednesday as the yield curve, the spread between short-term bonds and their longer-term counterparts, was widening , a move that tends to be good for the business models of financial institutions.

Reports out Wednesday morning gave a grimmer view of the U.S. economy than analysts had expected. The Automatic Data Processing report on private-sector employment showed the first drop in jobs since April. Private-sector jobs fell by 123,000, ahead of the more closely followed Friday employment report from the Labor Department. The U.S. IHS Markit purchasing managers index for December was also weaker than expected, although a report on factory orders was stronger.

Meanwhile, the U.S. IHS Market service sector purchasing managers index for December fell to 54.8 in December, down from 58.4 in November, signaling a slower expansion amid a surge in coronavirus cases.

On the coronavirus front, the U.S. counted at least 238,763 new cases on Tuesday, and at least 3,648 people died, according to a New York Times tracker. In the last week, the U.S. has averaged 219,650 cases a day.

Minutes of the Federal Reserve’s last meeting, which may give some insight into monetary policy, are due to be released at 2 p.m. ET.

See also: Here’s what a ‘blue wave’ forming in Washington means for markets

Which companies are in focus?
  • Shares of JPMorgan Chase &Co.
    JPM,
    +4.20%

    were more than 4% higher in early trade as investors bet on a steeper yield curve. Shares of Bank of America Corp
    BAC,
    +6.51%
    .
    gained 6.5%.

  • Tech giants lost ground: Amazon.com Inc.
    AMZN,
    -1.00%

    shares were down 1.3%, Facebook Inc.
    FB,
    -1.57%

    shares lost 2.6%, and Alphabet Inc.
    GOOG,
    -0.47%

    shares fell 1.6%.

  • Clean-energy companies like SolarEdge Technologies Inc. and TPI Composites Inc.,
    TPIC,
    +6.97%

    which makes wind-power parts, also surged.

  • Tesla Inc.
    TSLA,
    +2.96%

    shares were more than 3% higher, near $760, as Wall Street analysts remained divided over whether the company’s price target should be closer to $800 or $200.

Read: Here’s what a ‘blue wave’ forming in Washington means for markets

What are other markets doing?

Read next: Here’s how bitcoin could soon be worth $146,000 according to JPMorgan

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