As Political Tensions Ease, Wall Street Turns to Earnings Season

If, like many Americans, you went to bed with a sense of unease after the tumult in Washington, you’re probably feeling some relief this morning.

The market seems stable after Congress certified Joe Biden’s election win following unrest on Capitol Hill. Investors also apparently have more clarity now that the results of Georgia’s Senate runoffs have been projected, solidifying Democrat control in Washington and increasing expectations of more stimulus to come.

With the political tensions easing, more stimulus expected to help boost the economy, and coronavirus vaccines helping bring a measure of calm to investors and traders, it seems that the market can now focus on earnings season.

Earnings news this morning was largely positive as Walgreens (NASDAQ:WBA), ConAgra (NYSE:CAG) and Constellation Brands (NYSE:STZ) reported better-than-expected profit. Still, shares of housewares retailer Bed Bath & Beyond (NASDAQ:BBBY) dropped 13% ahead of the bell after reporting sales figures that fell short of forecasts. After the close today, Micron (NASDAQ:MU) is among companies scheduled to open their books.

Despite BBBY’s miss—which comes amid turnaround plans for the retailer—its same store sales rose 2% as customers shopped online for goods they can use at home, where they’ve been spending much more time during the pandemic.

Turning to WBA, shares of this Dow Jones Industrial Average component got beaten up last year, so the earnings beat comes as a welcome surprise for bullish investors or those perhaps wanting to buy on the dip. It also comes as COVID-19 vaccinations ramp up, which could provide an opportunity for WBA to see increased foot traffic—which had been trending lower in recent months. More people coming into the stores to get vaccinated could mean more sales of other goods.

Developments In Georgia, Washington Move Market

Stocks fared fairly well on Wednesday despite the tumult on Capitol Hill as investors apparently were thinking that a potential win by both Democrats in Georgia’s senate runoffs might lead to more stimulus payouts to Americans. Although Wall Street generally had a good day, shares did pare their gains—with the Nasdaq Composite slipping into negative territory—as protests in Washington took a violent turn and ratcheted up worry.

As of last night, it appears that the Democratic candidates have been projected to win both of the Senate seats up for grabs in Georgia’s runoff. Winning both seats would mean the Senate would be split evenly, with Vice-President Kamala Harris having the tie breaking vote.

It seems that Wall Street is thinking that a trifecta of Democrat control in Washington will increase the likelihood of more congressional stimulus that could help tide the economy over until widespread vaccinations can help get things back to some semblance of normalcy.

Those expectations of increased government spending helped lead to selling of U.S. government debt and helped push the yield on the 10-year Treasury above 1% for the first time since March. With the higher yields, the Financials sector was the strongest performer on the day, rising 4.36% in a welcome lift for the beleaguered sector. The gains came as rising Treasury yields pointed to potentially stronger bank profitability.

A rising tide for bank shares also contributed to outperformance of the Russell 2000 Index, a big chunk of which is made up of regional banks. But it was a double whammy kind of day for the RUT—in a good way. That’s because the index is quite exposed to the U.S. economy in the form of small-cap domestic stocks that would stand to benefit if Congress gives out more stimulus that helps boost consumer spending.

Big Tech Takes Back Seat

However, there was a flip side to optimism about stimulus helping the economy: The Information Technology sector was the day’s biggest loser, and the tech-heavy Nasdaq Composite gave up all its gains to close in negative territory. All of the FAANG names dropped, as did mega-cap tech company Microsoft (NASDAQ:MSFT).

It seems that as coronavirus vaccine rollouts continue and the $600 stimulus checks hit American bank accounts investors are now feeling like they have more alternatives when investing in stocks. That’s in contrast to times last year when market participants felt they needed the relative safety of the big technology corporations because of their size, strong cash balances, and demand for their products as people worked from home.

Shares in Big Tech were also under pressure, apparently, because some investors might view Democrats as being more willing to raise taxes on them and subject them to increased regulatory scrutiny. Tesla (NASDAQ:TSLA) bucked the trend though, as market participants bought shares of the electric vehicle maker in anticipation of more emphasis on clean energy under the Democrats.

10-Year Yields Daily Chart.10-Year Yields Daily Chart.

CHART OF THE DAY: 10-YEAR YIELD POPS ABOVE 1%. Since November, the 10-year Treasury yield retreated when it came close to the 1% mark and appeared to be forming an ascending triangle pattern. But yesterday the 10-year yield broke above the 1% mark, probably as hopes for further stimulus increased confidence in the economic situation. Data source: CBOE Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade (NASDAQ:AMTD). For illustrative purposes only. Past performance does not guarantee future results.

A Look Back at Democrat Trifectas: It’s interesting that expectations of a Democrat-controlled House, Senate, and White House sparked buying in equities yesterday. If you’ll recall, during the November elections, Wall Street was encouraged by expectations that a gridlocked government would forestall increased taxes and regulatory action that could pressure stock prices. Now, it seems, measures like those might have an easier time passing. But that doesn’t mean investors should necessarily worry. As investment research firm CFRA notes, it’s not unusual for first-term Democratic presidents to be supported by Democrat-controlled Congresses, and the stock market has tended to do well during those periods. “Should history repeat (although there’s no guarantee it will), investors may be unduly concerned about the effect of a Democratic majority on stocks and the economy,” according to CFRA.

Since 1900, all eight Democratic presidents enjoyed Democrat-controlled Congresses during their first two years in office. The market rose during the first year of six of those trifectas, with only Presidents Wilson and Carter seeing negative returns during their first year. Meanwhile, the S&P 500 Index rose by an average 9.8% during all Democratic trifecta years since WWII—versus 9% for all years. The index rose 77% of the time during trifecta years versus 71% for all years. The economy as a whole wasn’t left out either. Real GDP rose an average 4.3% during the Democrat trifecta years since 1948 while averaging only 3.2% for all years. But remember: Past performance doesn’t guarantee future results.

GDP Estimate Eases: Speaking of gross domestic product, the latest Atlanta Fed’s GDPNow estimate for fourth quarter real GDP has eased, but it is still well above where it was toward the end of October. The last reading from that month pegged seasonally adjusted annual GDP growth at 2.2%. The latest reading, from Tuesday, estimates the mother of all economic numbers to come in at 8.9%. The increase from the previous reading of 8.6% on Monday was helped by better-than-expected manufacturing data from the Institute for Supply Management. But it’s still lower than the 11.3% reading from mid-December.

Yield Sign: With the yield on the 10-year Treasury moving above 1% for the first time since March, it might be useful to look into factors that tend to move bond yields. Probably the simplest reason for Wednesday’s jump is that people sell U.S. government debt, which is viewed as a safe-haven investment, when they’re feeling better about things. Yesterday we took a step toward election certainty, and raised the likelihood of more stimulus in 2021. Because bond prices move inversely to yield, a selloff in Treasuries means a higher yield.

In theory, extra stimulus spending could end up boosting consumer demand and heightening inflation—another factor that tends to push yields higher. It might also move the Fed’s rate-hike timeline forward (recall that the central bank last year vowed to keep the Fed funds rate at zero until inflation exceeds its 2% target). But futures prices imply only a slim chance of a rate hike in 2021. Considering the virus-related headwinds constraining spending, though, it’s hard to see an inflation scenario in the short term that would change the trajectory. Still, the 10-year yield fell precipitously in the early days of COVID-19 and has been slowly clawing its way back ever since. A move above 1% looks like another step toward normalcy.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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