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UPDATE: Stocks surge with Democrats poised to retake Senate

Stocks surged to new highs Jan. 6 as expectations for a dramatic jump in government spending outweighed fears of higher corporate taxes and heavier regulation as Democrats appeared to win back the Senate. A violent pro-Trump protest that led to a lockdown at the U.S. Capitol had little noticeable impact on equities.

"Stock markets are holding up fairly well considering this was seen as the least desirable outcome, given Biden's promises on tax and regulation, in particular, but a big old stimulus may sweeten the deal," said Craig Erlam, a senior market analyst with OANDA.

Democrats are expected to take the Senate after Democrat Raphael Warnock beat incumbent Republican Sen. Kelly Loeffler on Jan. 5 in one of Georgia’s two Senate races. Major media organizations on Jan. 6 declared Democratic challenger Jon Ossoff the winner over Republican Sen. David Perdue in the other.

"The macro implications of these election outcomes are clearly positive," said Derek Halpenny, head of research at MUFG Bank. "There is now a chance of larger stimulus checks for US households ... and an increased prospect of larger fiscal stimulus support in general going forward."

The Dow Jones Industrial Average settled up 1.44% on the day at a new record high.

The S&P 500 climbed as much as 1.5% in early afternoon trading, reaching a new intraday high, with materials, financials and energy stocks leading the way on expectations of massive stimulus and infrastructure spending. Financials climbed 4.36% on the day, materials 4.09% and energy stocks 2.99%. The large-cap index settled up 0.57% from Jan. 5, just shy of the all-time high set on Jan. 31.

Tech and communication services stocks were the early losers on the day, with the Nasdaq falling 0.6% on the day, which analysts attributed to fears of harsher regulation of the tech sector by Democrats. Tech stocks on the S&P 500 fell by 1.81%.

But other possible efforts to boost taxes or strengthen federal regulation appear to be of less concern to much of the equity market as it rallied on hopes of additional stimulus and the likely bump in consumer spending to follow.

"More fiscal stimulus with the implicit goal of restoring the unemployment level to pre COVID-19 level will ensure strong demand in the economy and help underpin higher inflation rate," said Peter Garnry, head of equity strategy at Saxo Bank.

Small-cap stocks, which tend to be more cyclically sensitive and attuned to economic health than their large-cap peers, were rallying even more, with the Russell 2000 climbing nearly 5% in intraday trading and closing up almost 4%.

Many of President-elect Joe Biden's pledges seen as negative for market growth, such as higher corporate taxation, appear unlikely to be enacted due to the fact that major change may not be possible with just a slim majority in the Senate, said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.

"That may be a hurdle at some point, but not now," Stoltzfus said. "I think, for now, the market is saying it can abide with this."

As expected, bonds and the U.S. dollar were pushed lower on the results of the Georgia races.

The Dollar Index, which measures the U.S. currency against a basket of six peers, fell to its lowest point since March 2018, while the 10-year Treasury yield climbed above 1% for the first time March 2020. The 10-year Treasury yield settled at 1.04% on Jan. 6, up 8 basis points from Jan. 5.