Cannabis stocks drop as the possibility of a Republican Senate dims federal legalization hopes

• Cannabis stocks fell on Wednesday as the prospect of a Republican-controlled Senate dimmed investor hope for swift federal legalization of the drug.
• Four states legalized cannabis in ballot initiatives Tuesday: New Jersey, Montana, Arizona, and South Dakota.
• 1 in 3 Americans now live in a state where the sale of recreational cannabis is legal.
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The legalization of recreational cannabis sales in four states was not enough to help boost cannabis stocks as the prospect of a Republican controlled Senate dimmed investor hopes for swift federal legalization of the drug.

On Tuesday, Arizona, New Jersey, and Montana legalized the recreational sale of cannabis in state-wide ballot initiatives. South Dakota legalized the sale of both medical and recreational cannabis in its state. The successful ballot initiatives mean a full one-third of Americans now live in a state where the sale of recreational cannabis are legal.

MJ Alternative Harvest, an ETF that tracks more than 30 cannabis production, processing, and retail companies, sank about 2.5% in early trading Wednesday.

Cannabis companies based in Canada saw the biggest drop in their share prices in Wednesday trades as their entry into the US market based on the potential for federal legalization seems unlikely.

Tilray, Canopy Growth and Aurora Cannabis all traded down more than 5% in pre-market trades on Wednesday.

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Stifel analyst Andrew Carter said a Biden win and a GOP-controlled Senate would result in the "continuation of current policy, but with a more amenable executive branch potentially easing restrictions on the industry."

Another route for the easing of cannabis restrictions is through potential executive actions, Carter said, which could provide the US cannabis industry "with additional clarity around banking access as well as firmer assurances of non-intervention from the US government."

All eyes will be on the closely contested Senate races as control of Congress is viewed as integral to the path forward for federal cannabis legalization.