No matter how unsettled Main Street seems to be this week, it’s all good on Wall Street.
Despite the chaos in the U.S. Capitol, three benchmark stock indexes reached record highs Thursday amid optimism that the recent Democratic wins in Georgia’s Senate runoff elections could mean a new round of stimulus when President-elect Joe Biden takes office later this month.
The Dow Jones Industrial Average was up 0.7% Thursday, closing at a new high of 31,041.13. The S&P 500 Index rose 1.48% to close at a record 3,803.79. And the Nasdaq Composite was up 2.56%, reaching a new milestone at 13,067.48.
While the brokerage firm Oppenheimer suggested the S&P 500 could fall as much as 10% from its 2020 close if Democrats won both Senate seats in Georgia, investors seem to be more focused on the prospect of additional stimulus, according to some economists. The Senate is now evenly split—with Democratic Vice President-elect Kamala Harris as the tie-breaker—greasing the wheels for additional government support under the Biden administration.
In addition, such a slim Democratic lead in the Senate may be giving investors solace that anti-business policies—things like high corporate tax rates and increased regulation—won’t be as potent as they might otherwise be, economists said.
Beyond the next few months, the fate of stocks may depend on inflation expectations. If Democrats pass more spending bills throughout the year, financed by more government debt, investors may begin to worry about inflation and higher interest rates, CIBC economists wrote in a report Wednesday. For now, improved corporate earnings in line with a recovering economy should keep stocks somewhat higher this year, CIBC economists said.