U.S. stocks stabilized in the green, though remained well off session highs after protesters surged into the U.S. Capitol, forcing a lockdown that interrupted certification of the presidential election.
The S&P 500 rose 0.5% as of 3:25 p.m. in New York, down about 1% from its high. Equities had been on track for a record, buoyed by likely Democratic control of Congress that could unleash a torrent of spending to revive growth. That sparked a reflation trade, with investors pouring into small caps and banks, stocks that benefit from a surging economy. Tech shares lagged behind.
The buoyant mood was pierced, but not sunk, when the mob breached police lines outside the Capitol with Congress in session. Vice President Mike Pence left the floor of Congress where lawmakers were debating Joe Biden's victory in the Electoral College.
"Apparently, elevated investor sentiment knows no bounds," said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. "Obviously, the reflation trade stemming from last night's election results is driving the markets, but it takes a special set of blinders to ignore what we are seeing in real time."
Democrats claimed one of the two Senate seats contested in Georgia and led in the other tight race. Two wins would give Mr. Biden's party control of Congress and smooth the path for some of his spending policies. That's fueled bets that increased stimulus will boost the economy and spark inflation. The 10-year Treasury yield climbed past 1% for the first time since March, and the dollar fluctuated.
"The growth-into-value rotation may be reinforced after the results of the Georgia Senate election amid the prospect of a higher fiscal stimulus bill and steeper yield curve, which would benefit banks and other non-tech companies," David Bahnsen, chief investment officer of the Bahnsen Group in Newport Beach, Calif., wrote in a note to clients.
Congress passed at year-end a $900 billion spending deal to bolster an economy showing signs of slowing as the raging virus prompts stricter lockdowns across the country. The number of employees at U.S. businesses unexpectedly declined in December for the first time since April, underscoring the ongoing labor-market fallout from the coronavirus pandemic. The figures preceded Friday's monthly jobs report, which is projected to show weaker payroll growth.
Federal Reserve officials unanimously backed holding the pace of bond buying steady when they met last month. "All participants judged that it would be appropriate to continue those purchases at least at the current pace, and nearly all favored maintaining the current composition of purchases," according to minutes of their Dec. 15-16 meeting published Wednesday.
U.S. 10-year breakevens — a market gauge of inflation expectations over the next decade — topped 2% this week for the first time since 2018, having gained in each of the last three months. While the pandemic is still raging with the rollout of vaccines in the early stages, the risk is that further signs of inflationary pressure could start prompting bets on Fed rate hikes.
For Matt Miskin, co-chief investment strategist at John Hancock Investment Management, the ball will be in the Fed's court next and how policy makers will react to this evolving political backdrop.
"They have been wanting more fiscal support, well now they have it, and it is coming with a cost — higher interest rates based on Treasury yields rising," Mr. Miskin noted. "We will see what the Fed's pain threshold is for higher Treasury yields in the first half of 2021. The tug-of-war between monetary and fiscal policy will be key to markets. While the fiscal side is looking more promising based on the results today, monetary policy may take a step back."
Elsewhere, bitcoin jumped to another all-time high as extreme swings continued to buffet the world's largest cryptocurrency. And the New York Stock Exchange is proceeding with a plan to delist three major Chinese telecommunications firms, its second about-face this week, after U.S. Treasury Secretary Steven Mnuchin criticized its shock decision to give the companies a reprieve.