Markets react to prospect of 'blue wave' in Georgia Senate vote

Investors digested the somewhat unexpected win of two Georgia Senate seats by the Democrats on Wednesday, completing an apparent so-called blue wave that could have major consequences on the stock market.

Democrat Raphael Warnock beat incumbent Republican Kelly Loeffler in one of Georgia's two Senate run-offs, and Democrat Jon Ossoff was leading incumbent David Perdue in the other.

If those results hold, that would create a 50-50 split in the U.S. Senate but give the Democrats de facto control of the upper chamber, since the vice-president can break any tied votes. Functionally, once president-elect Joe Biden is inaugurated later this month, that means the Democrats will control both branches of Congress, along with the White House, and will have relatively free rein to implement their legislative agenda.

Investors were keenly aware of that fact on Wednesday morning, moving money in and out of sectors and assets that are poised to do well or poorly as a result of the so-called blue wave.

Cannabis stocks were sharply higher, as the Democrats are generally seen as being more open to legalizing the drug for recreational use. Currently, 36 states allow cannabis for medical use and an additional 15 for recreational, but it is still illegal at the federal level, which has hindered companies from growing and expanding.

The four major players in the sector are Canopy Growth, Aurora Cannabis, Aphria and Tilray, and shares in all four were between 10 and 20 per cent higher nearing midday.

"There's ... a greater chance that a Democratic-controlled Senate would support the removal of marijuana from the Controlled Substances Act," Bloomberg Intelligence analyst Kenneth Shea said in a note to clients on Wednesday morning.

"This could pave the way for populous states such as New York, Connecticut and Pennsylvania to accelerate legalization for recreational use."

The four companies' shares all list on the TSX and NYSE, which ties their hands given U.S. federal rules surrounding cannabis because, as Shea put it, "Canadian cannabis producers can't compete directly in the U.S. while cannabis remains federally prohibited without jeopardizing their listings on the Toronto and New York stock exchanges." But other cannabis companies that list on smaller U.S. exchanges aren't as limited, so fared even better in Wednesday trading.

Even if full legalization doesn't happen, cannabis companies stand to benefit from a loosening of a law known as the Secure and Fair Enforcement (SAFE) Banking Act, which makes it harder for cannabis companies to work with legitimate banks.

A Democratic Senate would be likely to repeal or amend SAFE, so: "If Ossoff's win is confirmed, it means likely cannabis banking becomes possible and the cost of capital comes down," Chris Damas, president of BCMI Research, a cannabis industry consulting firm, said in an email to CBC News.

Green energy shares

Renewable power companies in Canada also attracted some investor enthusiasm amid bets the stocks could benefit from Biden's green agenda.

The president-elect has vowed his administration would remove carbon pollution from the U.S. electricity system by 2035. 

Several renewable power companies in Canada already have a presence in the U.S., including Brookfield Renewable Partners, Algonquin Power and Utilities and TransAlta Renewables, which saw their share prices rise by as much as 6.5 per cent.

"Electricity demand is going to go up as more electric vehicles are being used, the electrification of everything," said Darryl McCoubrey, the head of research at Veritas Investment Research.

"That demand mandates new resources. And these new resources are being incentivized not to be carbon emitting, if you have these forms of tax credits that are only granted to renewables." 

One possible barrier facing Canadian players seeking a greater foothold in the U.S. power market is Biden's buy-American policy. His election campaign called for clean, American-made electricity."

Bad day for big tech

Cannabis companies may be a big winner, but big technology shares are an early loser. That's because huge companies like Facebook, Apple, Amazon, Netflix and Google — the so-called FAANGs —  have boomed during the pandemic because of strong demand for their services in the era of lockdowns and millions of people working at home and using more digital services.

But Democrats have threatened to put more scrutiny on such companies to combat their size and reach. Shares in all five of the FAANG stocks listed above were lower on Wednesday.

"What investors are trying to figure out is how quickly the Democrats would be able to introduce their tax agenda if they take control of the Senate, and would they be more likely to act on regulation on big tech," said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J.

Economist Derek Holt with Scotiabank said the market reaction makes sense, because investors are expecting new policies to come in sooner rather than later, if the results hold.

"If the results continue to indicate a blue wave outcome, then I think there will be a rush to implement as much as possible of Biden's overall platform over the next two years as incumbent administrations often don't fare so well in Congressional mid-terms," Holt said.