Nail-Biting Race In Georgia Lifts Yields, Softens Tech As Democrats Take Lead

Key Takeaways:

  • All eyes on Georgia as votes continue to roll in
  • 10-year yield climbs above 1% for first time in 10 months
  • Crude back above $50 for first time since last February

Investors woke up to an unfamiliar sight Wednesday: The 10-year Treasury yield is back above 1% for the first time since last March.

Yields rocketed higher while stocks looked mixed as Democrats took one Georgia Senate seat and led narrowly in the other Georgia Senate race with thousands of votes left to count. Strength in yields could reflect ideas that if Democrats do gain ground, another fiscal stimulus and increased Washington spending could grow more likely.

All this is speculation, and no one should be thinking that anything—including the makeup of the Senate as well as new policy priorities—is a done deal. We’ll know at some point who won, so let’s focus on what’s happening right now.

There’s the 10-month high in 10-year yields, obviously, and crude hit an 11-month high above $50 a barrel. That happened after Saudi Arabia surprised everyone with a voluntary one million barrel-per-day production cut, according to media reports. The jump in yields appeared to strengthen Financial shares including Bank of America BAC (BAC) and JP Morgan (JPM).

Back at home, the Nasdaq 100 NDAQ (NDX) is taking it on the chin as some of the big stocks there like Amazon AMZN (AMZN), Microsoft MSFT (MSFT) and Apple AAPL (AAPL) come under pressure in premarket trading. Why? Well, if it’s a 50-50 Senate (with a Democratic tiebreaker), there’s concern about more regulation on the Tech sector.

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At the same time, Financial stocks and the Russell 2000 Index (RUT) of small-caps are up early on. These parts of the market could get a shot in the arm from higher rates and stimulus hopes if Democrats do extend their lead. Banks benefit from higher rates because it tends to help their profit margins, while the RUT is more exposed to the domestic economy than other indices and also has a big population of regional bank stocks. More government spending (if there’s another stimulus) would likely help keep yields elevated.

In the world of individual stocks, some that might benefit from Democratic control include solar energy companies and electric cars. Tesla TSLA (TSLA) shares climbed in pre-market trading, and so did shares of a bunch of solar firms.

You could make a bullish case for either side winning. The bullish case for Democrats is more short-term (the chance for more stimulus), but a Republican victory might be longer-term bullish if it leads to more Washington spending discipline.

Trading could be choppy today as investors watch the votes roll in. It’s kind of interesting, though, to see the Cboe Volatility Index (VIX) a little lower this morning after it flirted with 30 earlier this week. Keep an eye on that if a final call gets made in Georgia.

Turnaround Tuesday As Peach State Votes

After starting the year with a selloff, the market turned things around Tuesday thanks in part to leadership from the small-cap RUT and so-called “value” sectors like Energy and Financials. The RUT outpaced every other major index, gaining nearly 2% after a 2020 that saw it recover from early weakness to have a better year than the large-cap S&P 500 Index (SPX).

A selloff in bonds yesterday might have gotten the party started both for Financials and the RUT (which has a large contingent of regional banks among its leading stocks). The market wavered and drifted up until early afternoon, and then saw a buying wave come in that lifted almost all the sectors.

Some decent data might have helped too, especially ISM manufacturing (see more below). The election was on investors’ minds, and it’s interesting to see how small-caps—which tend to be more sensitive to domestic fiscal policy—rallied Tuesday as voting took place.

What Else is Happening? Earnings Reports, Payrolls Data Ahead

Beyond the election and yesterday’s rally, this week is packed with data and even a few earnings reports.

Tomorrow, investors are expecting to hear from Bed, Bath & Beyond BBBY (BBBY), Micron (MU), Conagra CAG (CAG), and Walgreens Boots Alliance (WBA). All three of these firms have direct consumer exposure. Don’t know what CAG sells? Think about a bunch of stuff that might be in your pantry, including Slim Jims, Duncan Hines, Hunts’, and Vlasic. Yep, tomorrow we’ll get a better sense of how meat sticks, canned tomatoes, pickles, and cake mixes performed in CAG’s most recent quarter, and this is one of those rare companies whose stock has pretty much flatlined over the last year.

That can’t be said for WBA, one of the worst performers of 2020 and a prominent one because it’s listed in the Dow Jones Industrial Average ($DJI). It was the second-worst performer in the $DJI last year after finishing last in 2019. The company’s been hurt by more people getting prescriptions delivered by mail, which means fewer people coming in and browsing at stores. Some analysts think the stock has gotten oversold and may be able to top Wall Street’s estimates. We shall see.

Data-wise, the week kicked off with a really nice read on December ISM Manufacturing, which came in well above analysts’ expectations Tuesday at 60.7%. That topped November’s 57.5%, and was way above Wall Street’s average estimate of 56.4%. Believe it or not, the headline figure is now just 10 basis points below the recent high of 60.8% recorded in 2018, Briefing.com pointed out. Anything above 50% shows expansion, and manufacturing data often points toward future demand from businesses and consumers. This looks like a green shoot after some disappointing data over the last few weeks.

The big number this week is nonfarm payrolls—arguably the most closely-watched number each month—due out ahead of the bell Friday. See below for more insight into what that important report might show.

Something else to watch could be this new strain of virus reported recently in South Africa. It’s still early, but some scientists are worried about how it will respond to vaccines. Just keep in mind that if scientists do determine it’s less responsive, that could make for some ugliness in the markets. Obviously there’s no reason to panic, but just another uncertainty to factor into your thinking.

Thanks for the Raise: The new year brings higher pay for many, as 20 states raised their minimum wages on Jan. 1. The debate has raged for decades and probably will continue about whether doing this helps or hurts workers, businesses, and the economy. Also, with the pandemic raging and numerous shutdowns, it’s going to be hard to see an immediate impact. Some might argue that it could present an additional burden on small businesses, for that matter.

Still, if vaccinations get things back on a more normal footing and local shops and restaurants see some recovery, rising wages could put extra dollars in employees’ pockets, helping consumer demand down the road. The biggest minimum wage increase is in New Mexico, where it goes from $9 to $10.50. The corollary to this is high levels of consumer debt after the holiday season, which has some economists worried. If consumers are looking at empty pocketbooks as they try to pay their holiday bills, spending levels could get muted in coming weeks.

Watch Your Wallet: Investors expecting an economic recovery often turn to the Consumer Discretionary sector, hoping shoppers will feel more spending power. Since last June—with data generally improving from the virus-related lows—Consumer Discretionary improved too. It rose almost 26%, beating all but two other S&P 500 sectors over that time frame. Things might not be so cut and dried these days, however, and investors should realize Consumer Discretionary is a different sector than it once was. It’s now dominated by a few big stocks and their ups and downs, Barron’s pointed out in a recent arctic.

The most obvious of these are Amazon (AMZN), Home Depot HD (HD), and Tesla (TSLA), with AMZN and HD both up significantly in 2020 due in part to the “stay at home” market and TSLA going parabolic as it got added the S&P 500. These three stocks—all of which thrived amid virus-related shutdowns—now represent 54% of Consumer Discretionary by market capitalization. That means buying into Consumer Discretionary now and hoping to ride on a recovering consumer is actually “more of a lockdown play” than an investor might expect, Barron’s noted.

Gloomy Expectations for Jobs Report: After rebounding quickly from pandemic lows last spring, job growth has been on the downturn over the past few months and analysts expect that to continue in Friday’s December payrolls report. The average Wall Street estimate is for job creation of just 112,000, down from 245,000 in November and easily the worst figure since last April when the economy was hemorrhaging positions. This weakness could be driven partly by the new wave of virus-related shutdowns that hit the economy in November and continued as winter began, along with signs that companies might be waiting to see how the virus rollout goes before committing to major new hiring. The weak November payrolls report arguably helped lead to Congress pushing through another stimulus at the end of December, and if this report is also bad, it could reignite debate in Washington over the possibility of another stimulus.

Remember to monitor a couple of things when you check the report. First, which sectors saw job growth in December and which saw losses? It’s likely that the leisure and hospitality sector got hit hard by the shutdowns, but will manufacturing jobs growth be a little better considering the nice number we just heard Tuesday from the ISM on that part of the economy? Also, long-term joblessness is a big problem, and the unemployment rate doesn’t reflect that. In November, so-called “U6” unemployment was close to steady at 12%. The U6 rate includes discouraged workers who’ve quit looking for a job and part-time workers who are seeking full-time employment, and some economists think it’s a better measure of actual unemployment.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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