Cannabis stocks rose sharply yesterday in hopes that the bill to legalize recreational marijuana at the federal level would soon be introduced in the US Senate. While several states have gradually legalized adult-use marijuana it is still not legal at the federal level.

After reports of bills over cannabis legalization, there was a sharp rally in cannabis stocks. Tilray gained 14.6% while Aurora Cannabis gained over 12%. There was a broad-based rally in marijuana companies that have adult use operations.

Cannabis stocks have been quite volatile on the news of legalization. There was a rally in cannabis stocks in 2020 after Joe Biden was elected as the US president. Also, several US states legalized adult-use marijuana alongside voting for presidential elections.

The rally in cannabis stocks continued in early 2021 as Democrats took control of Congress. However, marijuana legalization has not been a priority for the Biden administration even as it has delivered on other agendas like the green energy transition.

The Cannabis Administration and Opportunity Act has already cleared the House but needs to get past the Senate as well. It would then need Biden’s blessings before it is made into a law.

However, the Act faces opposition from not only the Republicans but also some of the Democrats. It remains to be seen if the Act finally passes the Senate.

Marijuana Legalization Hopes have been Waning

Cannabis stocks have crashed over the last year on dwindling legalization hopes. Marijuana stocks have fallen to multi-month lows amid the market sell-off. Meanwhile, there has been a lot of consolidation in the marijuana industry. Last year, Tilray and Aphria merged to create the world’s largest cannabis company. The new entity has a strong presence in the Canadian adult-use marijuana market and European medical marijuana market.

Tilray has also been expanding into the US adult-use market. The company has recently completed its investment in Hexo. Tilray’s CEO Irwin Simon said, “We believe this proposed Transaction would be a win-win for Tilray Brands and HEXO as it would launch a strategic partnership between two leading Canadian cannabis producers with complementary brand portfolios. For us, it provides a path for meaningful future equity ownership of HEXO, and enables us to participate in HEXO’s share price appreciation as it continues to execute on its growth initiatives.”

Tilray also invested in MedMen to gain a foothold in the US market. Sundial Growers, which was among the meme stocks that were pumped by Reddit traders in 2021, has also been investing in other cannabis companies.

Cannabis Stocks Rallied on Legalization Reports

While cannabis stocks rallied yesterday, the rally looks short-lived as most stocks are trading lower today. US stock markets futures point to a strong opening today. US stocks were weak yesterday and the mood was dampened further after JPMorgan issued a cautious note on the US economy while releasing its second-quarter earnings.

Markets are waiting for more clarity on the legalization as such news has cropped up multiple times before also. Those who support marijuana legalization point out that legalization would help curb illegal sales and help boost revenues. Given the massive fiscal deficit, the federal government has anyways been looking at ways to increase its earnings.

Coming back to cannabis legalization, it could be a key driver for the sector. While analysts have been turning bearish on the sector, they could change their view of cannabis stocks after the legalization.

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