Freedom: Lower yields and oil prices supported a post-election rise in U.S. stocks

Expectations of restrained budget spending and lower government bond yields are supporting demand for U.S. equities after the congressional elections, says Freedom Broker analyst Vladimir Chernov. An additional positive factor was the drop in oil prices. However, after the market’s sharp rise, the expert allows for profit-taking: hopes for a settlement of the conflict with Iran still require confirmation through concrete decisions.

How the market reacted to the elections

At the close of trading on November 4, the Dow Jones Industrial Average rose by 3%, posting its best daily result in about a year and a half. The rally followed Democrats’ success in the midterm elections, after which the party gained control of both chambers of Congress.

The Dow Jones reflects the performance of shares of 30 large U.S. companies from various industries. Its rise shows that the improvement in sentiment affected a broad range of the largest issuers.

At the same time, the yield on 10-year U.S. Treasury bonds fell by about 0.06 percentage point to 4.89%, and oil ended the session down more than 8%. Investors were assessing the prospects for political constraints on the White House and a possible settlement in the Middle East.

Why lower yields help stocks

According to Chernov, investors expect Democrats in Congress to restrain further growth in budget spending. This expectation supports bonds and contributes to lower yields.

With lower yields on government securities, stocks become more attractive relative to debt instruments. In addition, lower market rates raise the current valuation of companies’ future cash flows. However, for now this is still about market expectations. A change in the makeup of Congress does not in itself guarantee spending cuts or a rapid shift in economic policy.

Cheaper oil supports transportation and industry

Falling oil prices may ease inflationary pressure and reduce costs for companies for which fuel is a significant expense item, Chernov notes. Potential beneficiaries include airlines, transportation companies, and industrial enterprises.

For Russia, the prolonged persistence of lower oil prices, on the contrary, creates risks of reduced export revenue and budget receipts. In the analyst’s view, this could increase pressure on the ruble and the shares of oil companies.

At the same time, the duration of the decline matters: a one-day drop in quotes is not enough for a sustained change in business financial results.

What could prevent the rally from continuing

Chernov warns that after such a sharp move, some investors may take profits. Further dynamics will depend on whether political changes lead to real decisions on the budget and the conflict with Iran.

Earlier, Freedom Broker in a pre-election review ahead of the congressional elections noted that historically the U.S. market tends to rise after midterm voting. At the same time, analysts emphasized that it is premature to count on a guaranteed rally: the Fed’s policy, corporate results, and the geopolitical situation remain important.

Not an individual investment recommendation.