The Dow Jones Industrial Average rose 437.80 points, or 1.44%, to close at 30,829.40. The S&P 500 gained 21.28 points, or 0.57%, to end at 3,748.14, and the Nasdaq Composite fell 78.17 points, or 0.61%, to close at 12,740.79. The biggest gainer on the S&P 500 was a smaller bankâ€”$7 billion by market capâ€” Zions Bancorp (ZION), up 11.2% on a day the financial-services sector rallied. The Russell 2,000, an index of small caps, rose 3.66%.
Democrats will control both chambers of Congress, after wins in Georgia. The Associated Press has declared both Raphael Warnock and Jon Ossof . Many on Wall Street believe that more fiscal spending could be on its way, a positive for economically sensitive stocks and a slight negative for growth tech stocks. Heavy Democratic representation could also mean harsher regulation on traditional oil, big tech, and banks, but the Biden administration also needs to prioritize on Covid-19 relief and investors havenâ€™t yet focused much on regulation.
Value stocks, more correlated to the state of the economy than growth stocks, outperformed. The Vanguard S&P 500 Value Exchange-Traded Fund (VOOV) rose 2.3%. The Industrial Select Sector SPDR Fund (XLI) rose 2.4%.
The value fundâ€™s growth counterpart (VOOG) fell 1%. Big tech stocks fell hard, with Apple (AAPL) and Amazon.com (AMZN) stock falling 3.3% and 2.5%, respectively. Thatâ€™s partly because interest rates soared on the back of higher inflation expectations resulting from the expected fiscal policy.
â€œI would bet that [the tech sell-off is] about the interest rates more so than the regulation,â€ Tim Courtney, CIO of Exencial Wealth Advisors, told Barronâ€™s. Higher interest rates lower the value of future corporate profits, which weighs on valuations across the board. Higher rates reflect a firming economy, creating an earnings tailwind for value, while growth stocks are stuck with the negative valuation impact. Potential tech regulation is on the back-burner, although sector names that wouldnâ€™t be subject to legislation tumbled, a reflection of the rate environment. Microsoft (MSFT), Salesforce.com (CRM) and Zoom Video Communications (ZM) fell 2.6%, 2.4% and 4.6%, respectively.
Small-cap value, perhaps the most economically sensitive equities, had a particularly strong day. Banks stocks skyrocketed, as higher long-term interest rates with short-term rates pinned down drastically improves bank profit outlooks. Zions Bancorp is an example, as is $16.5 billion Citizens Financial (CFG), which surged 7%. Diamondback Energy (FANG), a $9 billion oil producer, racked up a 5% gain.
Investors donâ€™t seem concerned with potential higher corporate taxes under a Democratic regime. Economists at RBC Capital Markets pointed out in a note that with a few centrist Democrats in the Senate, the corporate tax rate may not rise all the way to the 28% President-elect Joe Biden would like. The rate is currently at 21%. Plus, roughly 60% of S&P 500 revenue comes from overseas, which lessens the total tax increase global large-caps firms would see, and lessens the earnings impact. All in, the negative earnings impact on the S&P 500 could be to the tune of low single digits in percentage terms, Dan Eye, head of asset allocation and equity research at Roof Advisory Group a Division of Fort Pitt Capital Group, told Barronâ€™s. And â€œstimulus more than offsets [a] potential higher corporate tax rate,â€ wrote Tony Dwyer, chief market strategist at Canaccord Genuity, in a note.
Many factors were at play today, but investors are overall pleased with what they see.
Write to Jacob Sonenshine at email@example.com