The benchmark S&P 500 had jumped nearly four per cent since election day, driven in part by expectations that divided control over Congress will make it unlikely that a President Biden could pass his calls to increase corporate and capital gains tax rates.

The S&P 500 dipped 0.2 per cent in afternoon trading on Nov. 6, while yields on benchmark 10-year Treasuries rose to 0.82 per cent, their highest levels since before the Nov. 3 election.

Biden took the lead over President Donald Trump in the battleground states of Pennsylvania and Georgia for the first time, putting him on the verge of winning the White House.

However, Georgia appears set for run-off races in January to determine its two Senate seats. Biden’s move ahead in Georgia focused some investor attention on chances that the Democrats could have more sway in the Senate. If they won those two run-offs it would give them a tie in the Senate and give Kamala Harris a deciding vote.

Two other Senate races remain undecided, though Republican Senators Thom Tillis of North Carolina and Dan Sullivan of Alaska are leading in those contests.

“There is some concern with regards to if Biden creeps ahead or wins Georgia, then there is a chance that those seats will follow. That’s what people are reading into this. They’re saying, ‘OK, if there is this kind of momentum for Democrats, maybe the Senate (control) isn’t over yet.’ There’s a little bit of hesitation,” said Yousef Abbasi, global market strategist at StoneX Group Inc.

Justin Hoogendoorn, head of Fixed Income Strategy at Piper Sandler in Chicago, said “even if (Democrats) capture one Senate seat, it just becomes more plausible to push some legislation through. The closer they are to that, the more plausible.”

Unsettled control of Washington will likely weigh on markets as the United States continues to post record daily coronavirus case counts.

“If it’s contested, it adds a little bit of uncertainty” to markets after investors began pricing in a divided government, said Scott Brown, chief economist at Raymond-James.

Delays in the vote count also increased the risk of legal challenges, leaving investors in limbo, said Simon Harvey, currency analyst at broker Monex Europe.

“I think the big risks to markets now is if this isn’t wrapped up swiftly, especially considering the level of traction a Biden presidency has gained over the course of the day,” he said. “Any lack of clarity over the result… suggests markets will have to brace for a truly contested election with a series of court rulings.”

Still, despite the uncertainty, expectations for near-term market volatility had declined. The Cboe Volatility Index (or VIX) had fallen more than 11 points since the previous Friday, on track for the largest weekly decline since early April. VIX futures had also dropped broadly.

Few investors were calling for a deep decline in stocks, buoyed in large part by unprecedented levels of financial support from the Federal Reserve. The central bank said Nov. 5 that it will do whatever it can in the coming months to support the U.S. economy.

It created the fewest jobs in five months in October while the number of part-time workers increased, the clearest evidence yet that the recovery from the pandemic recession was slowing as new COVID-19 cases explode.

Some investors were starting to wade back into stocks that would benefit from a Democratic sweep of Washington. Clean energy exchange-traded funds jumped more than 1.1 per cent in early trading Nov. 6, while technology stocks — seen as more likely to face stricter regulations and more tax-motivated selling if the Senate flips to Democratic control — slipped 0.5 per cent.

“Now the focus is shifting from the president to Georgia and the Senate because that is really going to define what happens next,” said Ken Polcari, managing partner at Kace Capital Advisors. “But if Biden gets in and the Senate flips, then we are back to the sweep.”

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The $509-million ETFMG Alternative Harvest ETF gained 2.2 per cent in afternoon trade, while the $318-million Horizon Marijuana Life Sciences ETF rose 1.8 per cent during a market rally that pushed the U.S. benchmark S&P 500 up nearly 2.8 per cent (all figures US$).

Both funds are down more than 30 per cent for the year to date, extending a sell-off that began in spring of 2019 when lacklustre sales, high debt levels and concerns about the slow pace of U.S. regulation began to weigh heavily on the industry.

Concerns about supply chain issues and a slowdown in consumer spending as a result of the rapidly spreading coronavirus are weighing heavily on the sector, which was already facing declining fundamentals, said Michael Underhill, chief investment officer at Capital Innovations.

“You’re seeing a broad liquidation of any sectors that had weakness whatsoever,” Underhill said.

At the same time, cannabis companies are more popular among retail investors than institutional investors, making them more prone to rapid changes in sentiment, Underhill added.

“This is the downside of having a sector without a lot of institutional shareholder ballast,” Underhill said.

Shares of large cannabis companies such as Canopy Growth and Cronos Group are down more than 20 per cent over the past month while shares of Tilray Inc. have tumbled 54 per cent over the same time.

Despite those share price declines, there are signs that exchange-traded fund investors are staying the course, said Todd Rosenbluth, director of mutual fund research at New York-based CFRA. Funds such as the ETFMG Alternative Harvest ETF have not seen the same sort of outflows that the stock declines would suggest, Rosenbluth said, suggesting that the fund investors remain bullish on the sector.

“Investors who have chosen this as a long-term theme have remained committed rather than fleeing as the stocks inside have sold off,” Rosenbluth said.

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The issue is not simply the unpredictability of weather. Instead, fund managers say, they are struggling to model how extreme weather events from droughts to more powerful storms will affect commodity prices and, in turn, spending by farmers on equipment or seeds.

In November, the U.S. government published a report that found climate change will boost costs in industries including farming and energy production by increasing the frequency and severity of storms. The U.S.-China trade war has also clouded the outlook for U.S. farmers.

Early estimates of crop and livestock losses from this year’s floods are approaching $1 billion in Nebraska alone, and damages are expected to climb much higher for the region . The U.S. Department of Agriculture, meanwhile, has no way to compensate farmers for crops that were damaged when floods overtook their record-high stockpiles of grain.

“I just don’t know how to value these companies now,” said Christopher Terry, a portfolio manager at Hodges Capital in Dallas. “It’s harder to invest around a theme when you’re talking multi-decade impacts.”

More extreme weather in the Midwest, for instance, will boost the cost of grains for feed, which will cut margins of egg producers like Cal-Maine Foods, he noted. Barge companies such as Kirby Corp. that move commodities down the Mississippi River may have more days that operations are out of service because of flooding, he added.

Other fund managers said they were seeking agricultural companies that might actually benefit from more severe weather.

Michael Underhill, chief investment officer at Capital Innovations, said he is focusing on midstream companies such as grains merchant Archer Daniels Midland and production companies such as equipment maker Deere and Co. that may benefit from greater volatility in commodity prices. ADM has a proven track record of hedging commodity bets, he said, while Deere may benefit if higher crop prices following extreme weather prompt farmers to invest in new machinery.

“If you think the next 10 years will look like the last 10 years you are in a for a rude awakening,” he said.

Looking for winners

Incorporating the impact of climate change on agricultural stock valuations is something Wall Street analysts from firms including William Blair, Wedbush and R.W. Baird have largely avoided because it is hard to predict the impact on any one quarter or season. Analysts at these firms follow companies ranging from Bayer to retailer Tractor Supply Co.

“If weather conditions continue to have a more unforeseeable impact on agro business the best way to model this would be… to increase the beta-factor within the discounted cash flow model used by me. And no, I have not yet done so,” said Ulrich Huwald, an analyst who covers Bayer.

Private research companies like Four Twenty Seven have stepped into that void by providing quarterly climate risk scores for specific companies that focus on the impact of climate change events ranging from wildfires to rising sea levels on supply chains, operations, and trading markets.

Lucas White, a portfolio manager at GMO, runs one of the few actively managed mutual funds that target companies that may be significantly affected by climate change. While his fund has outsized positions in solar companies such as SolarEdge Technologies and First Solar, he also focuses on potash and phosphate producers that may see increasing demand as more severe storms wash away soil nutrients.

“Nobody knows what will happen with commodity prices and it’s more or less impossible to predict,” he said. “But farmers spend all this time getting their soil to be very productive and all of a sudden a huge downpour comes and they have to start from scratch again. It’s very difficult to produce agriculture in a world that is increasingly impacted by climate change.”

— David Randall is a Reuters reporter and author based in New York.

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