Wall Street staged a broad rally on Wednesday after Democrats captured both chambers of Congress from President Donald Trump's Republican Party, a result that removed a layer of political uncertainty just as a steep drop in crude prices eased inflation worries.
The S&P 500 climbed 1.6% and the Nasdaq rose 1.4%, while the Dow Jones Industrial Average posted its strongest session since April of last year with a 3% advance. Nine of the benchmark's 11 sectors finished higher, five of them up 3% or more, with consumer discretionary names leading at 4.2%. Energy was the outlier, sliding 4.8% as oil collapsed.
The bond market joined the move. The 10-year Treasury yield fell 4.7 basis points to 4.92%, the 2-year slipped 3.5 basis points to 4.60% and the 30-year eased 3.3 basis points to 5.30%. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) added 0.4%, though it remains down roughly 7% this year.
The dollar weakened, with the U.S. Dollar Index dropping 0.5% to 101.35, its lowest since Sept. 30. Emerging-market currencies rallied, led by the Mexican and Chilean pesos, and bitcoin gained 3% to trade above $80,000. Gold jumped 3.5% back above $4,000 an ounce, its best day since Aug. 19.
Overseas, Japan's Nikkei fell 1.5% while China's benchmark rose 2.3%. Europe added 1.8% and the UK 1%, and Brazil's market snapped a six-day losing streak with a 1% gain.
Oil's retreat reshapes the inflation outlook
The dominant driver may have been energy. Brent and WTI futures were headed for their sharpest weekly decline since April 2020, with Brent down nearly 20% this week and WTI off 15%. On Wednesday alone, WTI fell 3.0% to $93.22 a barrel and Brent dropped 2.8% to $100.65, though both remain more than 60% higher for the year.
Trump acknowledged that public opposition to the war with Iran weighed heavily on his party's losses, and said Washington would halt its $4 billion in annual funding for Israel after this year. Qatar has intensified mediation efforts to end the U.S.-Iran conflict.
The political shift is being read on Wall Street less as a mandate for gridlock than as a reduction in tail risk. With control of Washington settled for the next two years, the odds of radical policy shifts fall, and historical patterns suggest the second year of a presidential term is often soft, leaving a low bar for post-midterm gains.
Yet not everyone expects the election to reverse the trajectory of Treasury yields, which sit near multi-decade highs. Matthew Ryan, head of market strategy at Ebury, argued that a Democratic Congress can block new spending but cannot roll back measures already in force, and that overriding a presidential veto would require a two-thirds Senate majority the party does not have.
"Congress can block new spending but cannot unwind what is already in place," Ryan said, pointing to the 2027 debt-ceiling talks as the real fiscal test.
He sees energy prices, not fiscal policy, as the primary force behind elevated yields. "With the Iran war ongoing, we see limited pullback in yields in the near-term, both in the US and globally, which should both keep US assets attractive due to rate differentials and support safe haven flows into the greenback," he said.
Ryan identified only one plausible route to a sustained dollar decline: Democratic pressure on Trump to end the Iran conflict early, which would push oil lower and reverse safe-haven flows. "But ending the war would need Republican help and Trump keeps the final say, so a deal would more likely come from him than from Congress," he added.
He also noted that any sign of more orderly bond trading could weigh on the dollar and benefit higher-yielding emerging-market currencies. The iShares MSCI Emerging Markets ETF (NYSE:EEM) is up about 9% this year.
Central banks in focus
Attention now turns to the Bank of England, which decides rates on Thursday and is widely expected to raise borrowing costs for the first time in more than three years as it joins most G10 peers in fighting inflation. Markets have priced roughly 100 basis points of tightening by the end of next year. Sterling reached a seven-week high against the dollar on Wednesday and hovered near its strongest level against the euro since March of last year.
The Senate result carries implications for the Federal Reserve as well, since every nominee to the central bank's board requires Senate confirmation. Ryan said the Democratic win "should allay Fed independence fears, though the impact in reality is small given few governor positions will actually be available between now and the end of Trump's term."
Investors will parse German industrial orders and euro-area producer prices on Thursday, along with a rate decision from Norway and scheduled remarks from Cleveland Fed President Beth Hammack and Richmond Fed President Thomas Barkin.
Note: Yield figures reflect the closing level and change in basis points; oil and gold moves are Wednesday session changes.