Dow posts biggest gain of the year after Democrats take control of Congress
The Dow Jones Industrial Average soared nearly 1,600 points, or 3%, on Wednesday, its biggest gain of the year, as investors digested the impact of the Democrats' sweeping victories in the midterm congressional elections.
Other indexes also jumped, with the broader S&P 500 climbing 120 points, or 1.6%, to close at 7,689 and the tech-heavy Nasdaq Composite Index gaining 1.4%.
"Investors are happy to have the midterms out of the way," market analyst Adam Crisafulli, head of Vital Knowledge, told investors in a report. "This was a major source of uncertainty, and putting it in the rear-view mirror removes a key obstacle heading into a very favorable time of year seasonally."
The shifting political winds could affect a range of issues that influence investment returns, from the pace of the data center buildout and cryptocurrency industry regulation to proposals to cap credit card interest rates.
At the same time, Wall Street analysts do not expect the outcome to derail a stock market being driven more by robust corporate profits and solid economic growth than by politics.
"The magnitude of the gains for the Democrats in the midterms does not change too much for the near-term policy outlook, given the party still lacks a filibuster-proof majority in the Senate and President Trump has veto power to block legislation," Stephen Brown of Capital Economics said in a note to investors.
Stocks of solar power companies, dollar stores and hospital owners helped lead the way as Wall Street tried to sort the winners from losers following the widespread losses for Republicans.
Investors, meanwhile, see risks ahead for Mr. Trump's social media company, the artificial intelligence sector and businesses owned by Elon Musk, who donated heavily to Republicans. Trump Media & Technology's stock price fell nearly 25% on Wednesday, while shares of Musk-owned SpaceX and Tesla sank 3.8% and 3.3%, respectively.
Gridlock good for stocks?
Investors also expect the election results to heighten gridlock in Congress, with Democratic lawmakers now in control of both the House and Senate, and Mr. Trump threatening to wield his veto power to block any legislation he opposes.
Political gridlock has historically been good for markets because it limits Congress' ability to pass sweeping tax and spending legislation, reducing the risk of volatility, according to Wall Street analysts.
Meanwhile, stocks have generally performed well following midterm elections. The S&P 500 stock index rose an average of 15.5% in the six months after the last 14 midterm races, dating back to 1970, according to figures from investment firm Edward Jones.
"Economic growth, inflation, interest rates and corporate earnings have historically mattered more to broad investment performance than the party composition of Congress, especially if the president and congressional leadership come from different parties," analysts with the Wells Fargo Investment Institute said in a report.
"We do not expect sweeping policy changes," they added. "More likely, in our view, is a split-government alignment on affordability, energy policy and opportunities from artificial intelligence."
Beyond the Beltway, the midterm electoral results could affect key issues for investors, such as the pace of data center construction, with enormous spending on artificial intelligence helping drive stocks to record highs this year while also raising concerns about a bubble in tech stocks.
"In divided government, the policy implications at the federal level may be limited, but data center policy decisions sit at the state and utility-commission level, making gubernatorial and utility races important alongside Congress, particularly Governor Abbott's loss in Texas," Jeff Buchbinder of LPL Research told investors.
"LPL Research continues to expect the buildout to occur, but strong performances by Democrats in key data center states (and pushback from the 'not in my backyard' folks) may slow it down some, potentially increasing regulatory pressure on AI infrastructure stocks including semiconductors, machinery and power generation," he added.
