The stock market was having a mixed day in response to the Georgia election results. While one Senate run-off is yet to be officially called at the time of this writing, Democrats have successfully flipped one seat and it’s looking very likely that the other seat will flip as well, effectively giving the party a majority.
While technology stocks were having a rough morning, financial stocks were standouts. Wells Fargo (NYSE:WFC) was up by nearly 7% as of 10:10 a.m. EST, Bank of America (NYSE:BAC) was higher by 6.4%, and U.S. Bancorp (NYSE:USB) had gained nearly 5%, just to name a few of the biggest winners. Most other major bank stocks were higher as well, but by slightly smaller percentages.
There are two main reasons the banks — and these three in particular — are moving higher today.
First, with Democrats in control of the White House, the House of Representatives, and now likely the Senate, stimulus measures are far more likely to pass. President-elect Joe Biden specifically said that the proposed $2,000 stimulus checks were riding on the Senate races, and things like extended unemployment benefits, postponed (or even forgiven) student loan payments, and small business aid will likely face less resistance as well. This can be good news for the banks, as unemployed customers and struggling business owners could use the extra help to pay their loans back.
Second, bond yields are spiking higher in reaction to the election results as well. The 10-year Treasury yield (widely considered a good benchmark for consumer interest rates) rose above the key 1% level for the first time since March 2020 and sits at 1.051% as of this writing. Banks primarily make their money by lending and collecting interest, so higher rates typically translate to higher profits.
So, why are the three banks mentioned here doing even better on Wednesday than most of their peers? In the cases of Wells Fargo and U.S. Bancorp, both institutions are primarily commercial banks (as opposed to having large investment banking divisions), so the prospect of higher interest rates and fewer loan defaults helps them more than most. And Bank of America’s deposit base has a disproportionately high amount of non-interest-bearing deposits, so rising rates can increase that bank’s profit margin quicker than others.
To be sure, there’s still a long way to go before any of this translates to actual profits. But the bottom line is that Democrats flipping the Senate is likely to be a positive catalyst for the banking industry.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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