MW Dow soars as these areas 'likely market winners' of potential Republican sweep
By Christine Idzelis
'Markets will price in a future pro-growth policy agenda,' according to Sevens Report Research
Stocks were posting big gains midday Wednesday, with small-cap equities and cyclical sectors seen as market winners after Donald Trump won the U.S. presidential election and voting results pointed to a potential Republican sweep in Washington.
The Dow Jones Industrial Average DJIA was soaring around 1,368 points, or 3.2%, while the S&P 500 SPX jumped 2.1% and Nasdaq Composite COMP advanced 2.4%, according to FactSet data, at last check. Shares of Major Wall Street banks were jumping while small-cap stocks were beating large-caps.
Equities were surging as "a Republican sweep is the likely election outcome," Tom Essaye, the founder and president of Sevens Report Research, said in a note Wednesday. "This likely 'green lights' a solid year-end rally as long as growth and the Fed perform as expected."
The note described the Republican agenda as favoring "pro-growth policies," citing tax cuts, deregulation, "a focus on domestic industries and negotiating better trade relationships."
Essaye pointed to several exchange-traded funds as "the likely market winners from this policy stance," including the Vanguard Value ETF VTV, which invests in large-cap value stocks in the U.S., and the small-cap equities-focused iShares Russell 2000 ETF IWM.
As for cyclical areas of the market and industry-specific bets, the Industrial Select Sector SPDR Fund XLI, iShares U.S. Aerospace & Defense ETF ITA, Energy Select Sector SPDR ETF XLE and Materials Select Sector SPDR ETF XLB may be among the winners, according to the note.
Essaye also said other areas of the market captured by the SPDR S&P Bank ETF KRE, iShares U.S. Financial ETF IYF and SPDR S&P Insurance ETF KIE would benefit from a Republican sweep.
"Markets will price in a future pro-growth policy agenda and also price in a likely full extension (and possible increase) of the Tax Cuts and Jobs Act," he wrote.
'The big advantage'
For the stock market, "the big advantage" of a potential Republican sweep across the White House and U.S. Congress seems to be the likely extension of the Tax Cuts and Jobs Act as well as the potential for lower corporate tax rates under Trump, David Kelly, chief global strategist at J.P. Morgan Asset Management, said in a phone interview Wednesday.
But the bond market was selling off on Trump's White House win, on worries that his policies will translate into a larger federal deficit that will need to be funded by more issuance of U.S. Treasurys, said Kelly.
"People are pricing in a higher trajectory in the deficit," he said. "It's the biggest government deficit in the world."
Investors also are expecting more tariffs under Trump, which is inflationary, adding to bond market worries ahead of the Federal Reserve's upcoming decision on where to set interest rates, according to Kelly.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y was up about 17 basis points on Wednesday, at around 4.46%, FactSet data show, at last check. Bond prices and yields move in opposite directions.
Despite the market reflecting expectation for growth in the U.S. and inflation concerns tied to potentially more tariffs, investors on Wednesday were still expecting the Federal Reserve to cut its benchmark interest rate this week after concluding its two-day policy meeting on Thursday.
"The Fed is still likely to cut by 25 basis points on Thursday," said Kelly. Policy makers at the central bank "don't want to be seen overreacting to any political change."
Traders in the federal-funds-futures market saw on Wednesday a nearly 99% probability that the Fed will announce on Thursday that it's lowering its benchmark rate by 25 basis points to a target range of 4.5% to 4.75%, according to the CME FedWatch Tool, at last check.
The U.S. Treasury market's yield curve was getting steeper Wednesday, with longer-term rates climbing more than short-term ones. The yield on the two-year Treasury note BX:TMUBMUSD02Y was up about eight basis points at around 4.28%, according to FactSet data, at last check.
Banks may benefit from a steeper yield curve as well as potentially less regulation under a Trump White House, Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, said in a phone interview Wednesday.
Shares of Wells Fargo & Co. $(WFC)$ were soaring almost 14% in late morning trade Wednesday, while Goldman Sachs Group Inc. $(GS)$ surged more than 12% and Morgan Stanley $(MS)$ soared more than 11%, according to FactSet data, at last check.
Financial stocks were the best-performing sector in the S&P 500 in late morning trade, with a gain of more than 5%. The S&P 500 was building on an already strong year for the widely followed U.S. equities benchmark.
"In 2016, the Republican sweep led to a 4.5% rally into year-end and given the currently positive macroeconomic backdrop of solid growth, falling inflation and looming Fed rate cuts," said Essaye, "a rally to, and through, 6,000 in the S&P 500 before year-end is entirely possible."
The S&P 500 SPX closed Tuesday at 5,782.76 for a year-to-date gain of 21.2%, according to Dow Jones Market Data. The index was trading at around 5,900 midday Wednesday.
Based on election results so far, "we've got a Republican in the White House," as well as a "Republican-controlled Senate" and what could turn out to be a red sweep should Republicans win a majority of seats in the U.S. House of Representatives, said Samana.
"A lot of the people were bracing for something more drawn out" for the outcome of the U.S. election," he said. "There's a sigh of relief to see there being as much clarity and certainty as we have now."
While consumers may "bear some of the brunt of higher tariffs, markets now appear to view more tariffs as "positive for domestic producers," according to Samana. "It's the reason why small caps are up as much as they are," he said.
The small-cap-focused Russell 2000 Index RUT was up 4.7% around midday Wednesday, while the S&P Small Cap 600 index SML surged 5.2%, according to FactSet data.
-Christine Idzelis
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(END) Dow Jones Newswires
November 06, 2024 12:31 ET (17:31 GMT)
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