After weeks of buying and selling stocks on the expectation that Democrats would sweep both the White House and Congress in a “blue wave,” Wall Street investors lost little time in returning to their traditional political posture: Gridlock is good.
On Wednesday, bleary-eyed investors, traders, executives and analysts who had stayed up until the wee hours tracking election results predicted that Joseph R. Biden Jr. was likely to eke out a presidential victory while Republicans maintained their grip on the Senate and Democrats continued to hold the House. The resultant divided government seemed like it could be good for business: Stock and bond prices went sharply higher, with the S&P 500 closing up 2.2 percent.
Some investors and executives said that if Mr. Biden won, it would restore civility to the White House and bring more attention to issues like racial injustice. At the same time, Republicans in the upper house, led by the majority leader, Mitch McConnell, would be able to block parts of a liberal policy agenda that most worry Wall Street, such as tax increases, health care reform and closer scrutiny of the power of giant technology companies.
“We’ll be able to go to bed and not worry about what the president is going to do,” said Michael Novogratz, a former hedge fund manager. A victory by Mr. Biden would mean more stable trade policy and less divisive rhetoric, he said. “And yet, Biden’s not going to be able to raise taxes — you get the Mitch McConnell handcuffs,” he said. “So it’s kind of the best of both worlds.”
Going into Tuesday night, Mr. Novogratz, a Biden supporter who had expected a Democratic sweep, was betting that technology stocks would fall, but that the broader U.S. market would make gains. But around midnight, he said, he halved the size of his positions because the outcome was looking so muddy. He took the rest of the trade off this morning.
The prospect of a divided government “does push away the fear of investors of this highly progressive agenda that they generally don’t support,” said Doug Rivelli, president of the institutional brokerage firm Abel Noser in New York.
It could also give company executives some breathing room, said Tim Ryan, chairman and senior partner of the accounting firm PwC. “C.E.O.s want the ability to control their destiny,” he said. A divided government allows them to “execute their strategy without getting knocked off course from the right or the left.”
The S&P 500 had its largest daily increase since early June as pension funds, endowments and other big investors began buying stocks that reflected their view of the emerging near-term political landscape.
Health insurers were some of the biggest gainers: Cigna, Anthem and United Health all rose more than 10 percent on the expectation that a Republican-controlled Senate would most likely block significant health care legislation, such as a “public option” for health insurance that Mr. Biden had campaigned on. Giant tech companies also posted sizable gains. Google’s parent Alphabet, which is the target of an antitrust suit by the Justice Department, soared 6 percent. Amazon rose 6.3 percent. Microsoft was up 4.8 percent.
Many on Wall Street also expressed relief that with a divided government, Mr. Biden would be more likely to nominate moderate-minded officials to government agencies like the Treasury and the Securities and Exchange Commission that are central to the financial industry.
For months, investors had been making trades based on opinion polls that suggested a Democratic sweep of Congress and the White House. That had increased hopes for a large fiscal stimulus package, which would help jump start an economy reeling from the coronavirus pandemic.
Even though Mr. Biden’s platform included some proposals — such tax increases on corporations, capital gains and affluent individuals — that many on Wall Street viewed as potentially negative for stocks, analysts said investors were optimistic that a “blue wave” election would raise the likelihood of the large federal spending push that investors have clamored for.
But with expectations for such a push now dampened, financial stocks were mixed. Shares of major banks such as JPMorgan Chase, Bank of America and Wells Fargo fell as investors predicted there would be no near-term boost in economic activity to drive their profitable lending and capital markets businesses. Shares of the private-equity firm Blackstone Group were up 5.7 percent and Apollo Management was up more than 3 percent — a sign of relief, perhaps, that changes to taxes on investments were less likely to be forthcoming.
Investors also scaled back their bets on infrastructure and clean energy-related stocks. Mr. Biden has offered a $2 trillion plan to escalate the use of clean energy in transportation, electricity and construction, but that appears less likely without a unified government.
The asphalt maker Vulcan Materials and the heavy equipment rental company United Rentals — which had been expected to be a beneficiaries of a federal road-building boom — sank 9.2 percent and 11 percent. Solar energy stocks, which have come to be widely seen as a barometer of the likelihood of Democrats taking control in Washington, also fell.
Anticipation that a Republican Senate would keep a tight grip on the government’s purse strings meant less enthusiasm for smaller companies. The Russell 2000 index of small capitalization stocks — which tend to be more domestically focused firms whose businesses depend largely on activity in the United States — drastically underperformed the gain for larger stocks.
Investors in the bond markets seemed of a similar mind. Yields on U.S. government bonds tumbled, reflecting a weakening outlook for growth and inflation — key drivers of bond yields — as well as expectations that any economic stimulus push from Washington would be much smaller than expected under divided government, resulting in smaller deficits and less federal borrowing.
Some analysts argued that the decline in government bond yields also reflects the view among investors that the Federal Reserve will be more likely to keep interest rates lower for even longer, without fiscal action to stimulus growth.
“With fiscal policy being less generous than assumed, there’s pressure on the Fed do to more,” wrote Aneta Markowska, chief economist at Jefferies, a broker-dealer in New York.
David Gelles contributed reporting.