HIGHLIGHTS
Cannabis ETFs/Indices up over 30% in week following the election
4 states voted to legalise adult-use cannabis (NJ, AZ, SD, MT)
2 states voted to legalise medical use cannabis (SD, MS)
Additional states around New Jersey expected to follow NJ lead (NY, CT, PA)
Republican controlled senate has the potential to block federal legalisation
Banking reforms (SAFE Banking Act) likely to have cross party support
It is now 2 weeks since the American people went to the polls to elect a new President and, for most of the watching world, it appears clear that Joe Biden is going to be the next President of the United States. However, it was not only the next President that was on the ballot, 5 states were voting on medical and adult-use cannabis legalisation and there were all important Senate and House seats up for grabs. Now that some of the dust has settled, we wanted to take this opportunity to discuss the election results and the potential implications for the cannabis industry.
It is safe to say that cannabis has been a clear winner in this election with 5 states voting for new medical and/or adult use cannabis legalisation and a cannabis-positive Democratic administration in the White House. Following the announcement, cannabis stocks saw a swift uptick with most cannabis ETFs/indices up over 30% week on week and some stocks up by more than 130%. Surprisingly, many Canadian stocks actually outperformed their US counterparts post election. We believe this is in part due a renewed enthusiasm for the sector as a whole, and part as a result of investors having factored in the expected uplift to US stocks prior to the election. Some US cannabis indices are up over 120% over the last 6 months in comparison to +40% for Canadian indices, suggesting this is the case.
Above: Map of United States showing cannabis legalisation by state
All 5 states in which cannabis regulations were on the ballot passed the proposals.
• New Jersey – 67% voted to legalise cannabis for adult-use
• Arizona – 60% voted to legalise cannabis for adult-use
• Mississippi – 68% voted to legalise cannabis for medical use
• South Dakota – 70% voted to legalise cannabis for medical use and 54% for adult-use
• Montana – 57% voted to legalise cannabis for adult-use
This brings the total tally of states with legal medical cannabis to 35 and states with legal adult-use cannabis to 15. This equates to more than two thirds of the country’s population with access to medical cannabis and one third with access to adult-use. A new Gallup poll mirrors this momentum, with the survey indicating that public approval for cannabis legalisation has surpassed two thirds of the population this year. With state regulations moving in one direction, we can now look to those states that are likely to be next and whether federal legalisation is on the agenda for the upcoming presidential term.
Above: Gallup poll of Americans' views on legalising cannabis
Following New Jersey's vote to legalise adult-use cannabis, a domino effect is expected in the surrounding states. This group of highly populated states has indicated their intentions to progress their cannabis regulations in line with one another. Therefore, it is highly likely we will see New York, Connecticut and Pennsylvania propose similar changes to their regulations in the coming months. Beyond these, it is possible we will also see Florida, Ohio and Maryland move from medical to adult-use next year and South Carolina, North Carolina and Kentucky may potentially become the next states to legalise medical use.
At the federal level, the path to progress is less clear cut. On the positive side, come January we will have a cannabis positive administration in the White House. Biden has publicly declared his support for decriminalisation and federal legalisation of medical cannabis. While Harris is the lead Senate sponsor of the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act, which seeks to end the federal prohibition of cannabis and provides inducements for states to expunge the records of those with cannabis-related convictions. The Democrat controlled House of Representatives is scheduled to vote on the MORE Act in December and it is expected to pass. However, it will be in the Republican controlled Senate that barriers remain.
Senate majority leader, Mitch McConnell, has been a staunch opponent to cannabis legalisation and has blocked numerous cannabis reforms. Prior to the 2022 mid-terms, his continued presence would seem to block the passage of the MORE Act or the STATES Act, which would exempt federal enforcement of cannabis and defer to state regulations. Of the two, the STATES Act is more likely to gain support from Senate Republicans due to the libertarian nature of the legislation. Additionally, the growing number of Republican Senators in states with adult-use cannabis (8) may also add weight to the side federal legalisation.
Other cannabis reforms may also be able to garner cross party support. We expect the Secure and Fair Enforcement (SAFE) Banking Act (which will provide cannabis companies with improved access to banking services) and amendments to 280E of the tax code (which currently prohibits cannabis companies from benefiting from federal tax credits and deductions) to pass either as part of Covid Relief Bill or as standalone pieces of legislation. Administrative action to re-schedule cannabis is also possible.
The North American cannabis industry has had a rocky last 18 months but this election has highlighted the continued progress the industry is making despite structural barriers remaining in place. Piece by piece these barriers are being torn down and the sector is reaping the benefits. Increasingly, any stigma associated with cannabis is falling away, indeed this is the year that we saw many US states declaring medical, and in some cases adult-use, cannabis to be an essential product.
The Chrystal Capital team remain very positive for the prospects of the industry globally. We believe that medical cannabis has become a new viable alternative asset class that is only going to become more established and pervasive in the coming years. We have launched Verdite to provide investors with diversified exposure to this high growth industry and welcome the opportunity to discuss our views with you further.