Following years of disappointment after an initial surge of optimism, weed stocks are finally showing upside momentum. During Monday’s afternoon session, Sundial Growers (NASDAQ:SNDL), Tilray (NASDAQ:TLRY) and Canopy Growth (NASDAQ:CGC) were up 2%, 4% and 16.5%, respectively. Apparently, investors are bidding up the cannabis industry based on speculation that Senate Democrats will soon introduce a bill aimed at decriminalizing marijuana at the federal level.
Of course, the news is significant for weed stocks. The sector has outgrown the Canadian market, with the underlying nation becoming the first G7 member state to legalize marijuana in 2018. While a seminal moment in history, the outcome quickly encountered a brutal reality: Canada’s adult population is just under 31 million people, whereas the U.S. adult population stands at over 258 million.
In order for weed stocks to be able to thrive, they essentially need the U.S. to decriminalize or legalize cannabis. For now, only individual states have done so, creating legal ambiguities that have kept many financial backers on the sidelines. Also, the Agriculture Improvement Act of 2018 only permits hemp/cannabidiol (or CBD) products that contain less than 0.3% delta-9-tetrahydrocannabinol content.
Weed Stocks Face a Tough Political Challenge
According to a Bloomberg report, Senate Democrats may soon introduce a bill designed to decriminalize marijuana at the federal level. Naturally, weed stocks that have long sought positive news jumped on the encouraging development.
However, the Cannabis Administration and Opportunity Act (or CAOA) likely stands little chance of making it to President Joe Biden’s desk this year. For one thing, lawmakers have already pushed back against the exact timing of the bill’s introduction. More significantly, Capitol Hill has promised similar votes regarding the CAOA, only to be denied.
Why It Matters
Though Democrats currently control Congress, it’s by the slimmest of margins. With Republicans generally showing little interest in legalizing marijuana at the federal level, Senate Democrats basically require 100% consensus to push forward partisan legislation. However, Sen. Joe Manchin’s striking down of climate bill negotiations confirms that consensus is sometimes difficult to achieve.
Fundamentally, then, investors eyeballing weed stocks today must approach the sector extremely carefully. While it may be great to see an embattled arena finally get some positive traction, most signs point to an unsustainable head fake.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.