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Politics often matters to investors, but its importance is not always obvious.
Compare the market reaction to Donald Trump’s victory in the White House in 2016 and the immediate response to the prospect of a double Democratic victory in Georgia, which gives the party control of the (fair) Senate.
In 2016, bank stocks soared, while tech stocks initially fell and then lagged the market for months. Politics students had a simple explanation: Republicans prefer Wall Street, while Silicon Valley is a progressive stronghold.
Easy, but wrong, as the Georgia Senate vote showed. Investor response to Georgia’s vote was to buy banks and sell Big Tech.
Of course, politics have changed and Facebook and Amazon are now treated like bad guys by many on the left. They would be the biggest losers from corporate tax cuts President-elect Joe Biden has promised to partially reverse. The possibility of a capital gains tax hike with a Democratic-controlled Senate is also expected to hit stocks that have left investors sitting on big unrealized profits.
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