Stock & Bond ETFs Surge After Election

Stocks surged and bonds tumbled as votes from last night’s contentious U.S. elections continued to be counted on Wednesday. While key races have yet to be decided, investors were bracing for gridlock as Democrats were on track to hold on to the House of Representatives, while Republicans maintained power in the Senate.

As of this writing, the presidential election was still up for grabs, though Democratic challenger Joe Biden was leading in the key battleground states of Michigan and Nevada—two states, which, if he won, would tip the electoral college in his favor.

In any case, a split government looks likely, meaning sweeping legislation will be extremely challenging to pass going forward. That includes the corporate tax and capital gains tax hikes that Joe Biden has proposed.

All else equal, lower taxes are a positive for stocks. The SPDR S&P 500 ETF Trust (SPY) closed 2.2% higher on the session.

Tech Tax Fades?

Outpacing even that hefty gain in the broader markets was the technology sector. Biden’s minimum tax on corporations was expected to disproportionately affect the sector, so tech stocks may have seen some relief on Wednesday as the likelihood of that tax passing faded. The Vanguard Information Technology ETF (VGT) was last trading up by 3.4%.

Meanwhile, certain industries within the tech sector are benefiting for other reasons. California voters approved Proposition 22, which allows certain ride hailing and delivery companies to continue classifying their workers as independent contractors instead of employees.

The SoFi Gig Economy ETF (GIGE), which holds stocks like Uber and Lyft, traded up by 4%.

Less Spending, Higher Bonds

Stocks weren't the only asset class keying off the latest election results. The bond market, which was bracing for a Democratic blue wave—control of the House, Senate and White House—surged as the prospect for sweeping legislation dimmed. The 10-year Treasury yield dropped from 0.9% on Tuesday to 0.77% on Wednesday (bond prices and yields move inversely).

The iShares Core U.S. Aggregate Bond ETF (AGG) traded up by 0.7%, while the iShares 20+ Year Treasury Bond ETF (TLT) gained 2.2%.

In addition to dampening expectations for legislation for clean energy projects and infrastructure, the prospect of a split government also reduces the likelihood of a major COVID-19 relief bill. Senate Republicans have balked at the multitrillion-dollar bills favored by Democrats, so a smaller package is likely if the latest results hold.

Health Care Surges, Solar Tumbles

Even if he contends with a Republican Senate that blocks many of his moves, a President Biden could still have an impact. One of those areas where he could be most influential is health care, where the Democrat has promised to do all he can to support the Affordable Care Act, which provides insurance for millions of Americans.

The Supreme Court is scheduled to debate the constitutionality of the law on Nov. 10.

The Health Care Select Sector SPDR Fund (XLV), which holds health care stocks that tend to benefit when more Americans are insured, was up 4.4% on Wednesday.

Meanwhile, the Invesco Solar ETF (TAN) tumbled 2.1% as investors in the fund anticipated that Biden’s proposed $2 trillion clean energy and intrastate spending plan is unlikely to become law.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2