Investors were encouraged on Wednesday by the prospect that Democrats would have a unified government within weeks and usher in a wave of new spending to shore up the economy. Even as a mob stormed the U.S. Capitol, stocks ended the day higher.

The violence broke out during proceedings to certify Joseph R. Biden Jr.’s Electoral College win, quickly escalating into chaotic scenes of rioters inside the building.

The S&P 500 fell from its highest point of the day, after sliding from that peak in the moments after the Capitol was placed on lockdown, but it ended with a gain of 0.6 percent. The Dow Jones industrial average rose 1.4 percent to a record. Trading in other corners of the financial markets showed investors were focused on the economic growth that could follow as Democrats push for more federal spending.

The Russell 2000 index of small stocks — which are closely tied to the domestic economy — surged 4 percent, its biggest daily gain since last May. Government bond yields climbed to levels not seen since March and oil prices rose.

“It’s impossible to put a positive spin on what’s going on in Washington,” said Steve Sosnick, chief strategist at Interactive Brokers in Greenwich, Conn. “It’s disturbing but it ultimately doesn’t really change the long-term picture, at least as it stands now.”

The rally had begun early in the day, after a Democrat, the Rev. Raphael Warnock, defeated a Republican incumbent, Kelly Loeffler, in one of Georgia’s two runoff elections for Senate. Another Democrat, Jon Ossoff, was declared winner of his race against the other Republican incumbent, David Purdue, later in the day.

The two victories mean that Democrats will effectively retake control of the upper chamber, drastically expanding the legislative possibilities available to the incoming Biden administration. Mr. Biden has said he would push for more financial aid to help individuals, businesses and state and local governments weather ongoing economic pain from the coronavirus pandemic, and also outlined a plan for more government spending on clean energy, infrastructure, health care and education.

Most economists say such spending would be a boon to the American economy, which remains in disarray after an almost yearlong pandemic.

The idea that Democrats could take control of both the White House and both houses of Congress had also been raised as a concern for stock investors, because it could give the incoming Biden administration the ability to raise taxes or increase regulation.

But by Wednesday investors seemed to have settled on the idea that Democrats would push for spending but hold off on other parts of their agenda that Wall Street had feared.

“The Democrats have made it perfectly clear that they want to spend more money. They wanted to do a $2 trillion or $3 trillion stimulus, and we only did $900 billion, so it’s pretty likely we’re going to get another trillion to two trillion of spending,” said Mike Wilson, chief U.S. equity strategist at Morgan Stanley. “And that could be pretty quick.”

Among larger stocks, companies in industries likely to benefit from a growth boost led the gains on Wednesday. Commercial banks, producers of construction materials, automakers and machinery stocks were higher.

And shares of companies that could stand to gain from President-elect Biden’s push for renewable energy soared. Sunrun and Sunnova, two of the country’s largest home solar power companies, jumped 16.5 percent and 8 percent.

Firms that would benefit from a wave of infrastructure spending also leapt. The engineering and construction firm Granite Construction, which specializes in civil and transportation infrastructure projects, rose more than 15 percent.

In the energy markets, West Texas Intermediate futures climbed above $50 a barrel after having jumped 5 percent on Tuesday following Saudi Arabia’s pledge to cut production to bolster prices.

A Democratic agenda underpinned by government spending, both as a response to the pandemic and also to make long-sought upgrades to the nation’s infrastructure, would require more borrowing and increase the amount of Treasury notes and bonds in the market — which would put pressure on bond prices and increase yields, which move in the opposite direction.

The yield on the benchmark 10-year note climbed above 1 percent, a level it has not seen since March. Low interest rates — which make stocks more attractive relative to bonds, their main investment alternative — have been a cornerstone of the stock market’s rally. Some analysts said that runaway interest rates could become a headwind for stocks.

There are other potential pitfalls for the market stemming from unified Democratic control in Washington. If enacted, higher taxes on wealthy individuals and corporations would likely weigh on the market, analysts say.

But it’s unclear if the Biden administration will prioritize tax increases given the Democratic Party’s thin working majorities in both the House of Representatives and the Senate.

[Read More…]