Volatility Market Braces For ‘Too Close to Call’ Georgia Runoffs

Photographer: Colin Douglas Gray / Bloomberg

Investors are not quite ready to leave this chaotic year behind. There is one more lingering risk event to worry about: the final races of the 2020 election taking place next year.

While not as pronounced as the hedging seen around election day last month, options and volatility futures indicate heightened concerns about possible market turbulence as a result of the results of the January 5 runoff races in Georgia, which will determine whether Republicans take control of keep the Senate.

Ahead of the November vote, many viewed a Democratic sweep of the election as one of the most optimistic results for US stocks. Since then, however, the market has shown that it is comfortable with a possible ongoing division over the government – a backdrop that has historically delivered strong returns.

“There is no doubt that if you go from red to blue, you have to price something that looks less favorable because markets like stalemate, markets that appreciate the status quo,” said Phil Camporeale, CEO of multi-asset solutions for JPMorgan Asset Management.

The focus on the outflow – and the demand for hedges to protect against turbulence in the aftermath – is on uncertainty about exactly how investors should position themselves for a Joe Biden presidency. He needs senate democratic scrutiny to enact an agenda that would boost green energy companies at the expense of fossil fuel producers, likely leading to more economic aid packages and infrastructure spending. But it could also help him raise the corporate tax rate and strengthen regulatory oversight.

“It is impossible to exaggerate how important these elections are to the size, scale and speed of fiscal, fiscal and regulatory policies in 2021,” Cowen analyst Chris Krueger wrote in a December 21 note.

Hedges in place

There are potential winners and losers in both scenarios and the question is which longer term scenario would be a better scenario for the general stock market. But traders seem to be hedging against volatility that could erupt in the near term if the Georgian results lead investors to pile on to the outcome’s supposed beneficiaries and dump the alleged losers.

The hedge likely also reflects concerns that even small surprises could create turbulence in a stock market that needs the general public to keep investing after a spectacular run. The S&P 500 is up 65% from its March low, with an assortment of valuation metrics at their highest in a decade or more.

“The idea that tax policy and government purchasing could be more important than revenue and revenue – is a lot like 2020, isn’t it? – is instinctively uncomfortable and supports a persistent above-normal volatility, ”wrote Julian Emanual, equity strategist at brokerage BTIG, in a recent note.

Biden stocks will have history and fed on the side, not much else