The stock market had a volatile performance on Wednesday. Initially, investors seemed dismayed by the early results from the Georgia Senate elections, which suggested that the Democrats would be able to take control of both chambers of Congress. Yet market participants got over that quickly, pushing the Dow Jones Industrial Average (DJINDICES:^DJI) to gains of more than 600 points at its best level. Even civil unrest in the nation's capital wasn't enough to entirely reverse the session's rise, although the Dow and S&P 500 (SNPINDEX:^GSPC) finished well off their highs and the Nasdaq Composite (NASDAQINDEX:^IXIC) actually lost ground on the day.


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Data source: Yahoo! Finance.

The Dow has generally had trouble keeping up with the performance of the Nasdaq Composite, but today, it turned the tables on its tech-heavy peer. Much of the reason came from a surprise winner in the aftermath of the Georgia Senate elections: bank stocks, which powered higher.

A big win for banks?

Major financial institutions saw sizable gains. On the retail side of the business, big banks had a strong day, with Wells Fargo (NYSE:WFC) leading the way higher with a 7% rise. Bank of America (NYSE:BAC) and Citigroup (NYSE:C) weighed in with gains of around 6%, while JPMorgan Chase (NYSE:JPM) enjoyed a 5% jump.

More investment-heavy banks also fared well. Morgan Stanley (NYSE:MS) finished the day up 6%, while Goldman Sachs (NYSE:GS) settled for a 5% rise.

Large vault with circular door and ramp leading into the secure area.

Image source: Getty Images.

Smaller regional banks saw even bigger increases in their share prices in some cases. Zions Bancorp (NASDAQ:ZION) finished Wednesday higher by 11%, while Western Alliance (NYSE:WAL) and Fifth Third Bancorp (NASDAQ:FITB) posted 10% advances. Even superregional U.S. Bancorp (NYSE:USB) was able to join the party with a 6% uptick.

Why no one expected banks to do well

Coming into the Georgia elections, many investors were nervous about the potential for Democratic victories in the southern state. Under President Trump and his administration, regulation of the financial sector had eased up in the past four years. Market participants saw the potential for divided government on Capitol Hill as a positive for bank stocks, as a Republican Senate would be able to block Democratic attempts to enact harsher restrictions on banking practices.

Yet as it turned out, the news from Georgia didn't have the impact that many had anticipated. Rather than worrying about regulation, bank stock investors focused on two areas in which Democratic control of Washington might lead to better outcomes for their business. First, in the immediate future, the possibility that the federal government might provide larger stimulus checks for millions of Americans would help support banks. Additional checks would likely boost people's bank account balances and add to profits for banks.

In addition, the bond market believes that Democrats are more likely to encourage greater government spending overall, and Treasury yields rose in response. Higher bond yields mean greater potential for profit for banks from making loans, especially when coupled with short-term rates that are likely to remain near zero for the foreseeable future.

The effect of politics on stocks is not always obvious

Today's surprise move for bank stocks just goes to show that trying to predict the movements of the market based on political outcomes is fraught with peril. Even if you guess right on the way voters will decide, you can still get the consequences wrong. It's easier just to focus on great companies that will prosper no matter who's in office.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.