Wednesday morning brought a return to the bullish market environment that we saw throughout much of 2020. Many had predicted that stocks would sell off if it appeared that the Georgia runoff elections for the U.S. Senate would lead razor-thin Democratic control of Congress. However, after an initial drop, major benchmarks pushed substantially higher by midmorning. Just before 11 a.m. EST, the Dow Jones Industrial Average (^DJI) was up 476 points to 30,868. The S&P 500 (^GSPC 1.30%) gained 42 points to 3,769, and the Nasdaq Composite (^IXIC) picked up 28 points to 12,847.
One unabashed winner in the aftermath of the Georgia elections was the cannabis stock sector. Even though marijuana companies have been able to find ways to operate in the state-by-state patchwork of legality they've found, many cannabis investors have hoped for a more unified approach to pot legalization that's more clearly consistent with the concept of federalism and the Supremacy Clause of the U.S. Constitution. The odds of such an outcome may just have improved considerably.
Big gains for pot stocks
Stocks across the cannabis sector had extremely strong gains. Tilray (TLRY) and Canopy Growth (CGC -0.66%) were among the biggest winners, with rises of 16%. Aurora Cannabis (ACB -3.55%) saw an 11% jump, and Cronos Group (CRON -1.67%) and Aphria (APHA) managed to post increases of 13% and 11%, respectively.
The argument for these gains is simple: Marijuana investors want pot legalized in the U.S. at the national level.
It's not so much that investors expect that cannabis would suddenly become available to everyone across the country. Even if a federal law were to decriminalize marijuana, it wouldn't necessarily follow that the federal government would take the additional step of exercising supremacy and saying that states would no longer be able to declare pot ownership a crime. Indeed, there would likely be substantial opposition to that infringement on states' rights.
However, there'd be massive benefits to making cannabis legal under federal law. The most important is that U.S.-based pot operators would be able to start acting like normal businesses. Currently, many financial institutions avoid working with local dispensaries due to the uncertain status of their businesses in dealing with federally declared controlled substances. Legalization would suddenly make regular banking relationships possible, taking away the cash-heavy alternatives that pot shops across the country have largely had to resort to in order to stay in business.
Another type of move for pot stocks
The other big impact of federal legalization would be to make more marijuana stocks accessible to investors. Currently, major stock exchanges like the NYSE and Nasdaq haven't allowed U.S.-based cannabis companies to list their shares because of their businesses being illegal at the federal level. That's led to the difficult situation in which legal Canadian pot stocks get to list on U.S. exchanges, while U.S. pot companies have to settle for over-the-counter trading.
Trading over the counter has several downsides. It can be harder to trade stocks that aren't on major exchanges, as there are fewer market makers helping to keep trading orderly and provide liquidity. More importantly, brokers like Robinhood don't even allow trading in over-the-counter securities, and even those brokers that do sometimes charge additional fees or introduce other hurdles that NYSE- and Nasdaq-listed stocks get to avoid.
If federal cannabis legalization were to occur, that would likely change. U.S. pot stocks currently relegated to over-the-counter trading would scurry to file for major exchange listings. That would dramatically increase availability of stocks, enabling companies like Curaleaf Holdings (CURLF -2.65%), Green Thumb (GTBIF 1.13%), and Trulieve (TCNNF -1.77%) to find their way into more investors' portfolios. It's no surprise to see shares of those companies up 8% to 10% today as well.
Keep your eyes on Washington
Final results of the Georgia elections aren't yet in, and even if control of the Senate does change hands, there will still be huge political battles with no margin of error. Nevertheless, investors generally feel comfortable that they'll be able to deal with whatever comes -- and pot stock shareholders will eagerly await what happens with marijuana legislation in 2021.