The second two-seat US Senate elections in Georgia next Tuesday have the potential to inject volatility into a high-flying stock market that has especially looked past the political turmoil in Washington this year.
Market participants say any investor complacency could be out of place because if the Democrats win both Senate seats, President-elect Joe Biden’s new administration would control both chambers of Congress and could reverse the cuts in the corporate income tax of 2017, corporate earnings and stock prices to some extent.
However, a Democratic victory could also boost stocks by raising expectations for more aggressive fiscal stimulus next year, on top of the billions of dollars already deployed by Congress.
These are reasons why the election in Georgia could become a “big deal” for Wall Street, Michael Reynolds, investment strategy officer at Glenmede, said in an interview.
“If we get a shot in the arm with a bigger tax package, you have to balance that with the specter of rising corporate tax rates,” Reynolds said.
Most analysts predict a victory for incumbent Republican senators from Georgia, and gambling market PredictIt gives Republicans a 65% chance of retaining leadership of the Senate from Thursday.
But the Democratic challenger Rev. Raphael Warnock leads Republican incumbent Senator Kelly Loeffler by 1.8 percentage points in a RealClearPolitics moving average poll for one of Georgia’s outcomes. And in the average of RCP surveys for the other game in Georgia, Democrat Jon Ossoff is 0.8 percentage points ahead of GOP Senator David Perdue.
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So the outcome of the January 5 run-offs could create volatility in a frothy stock market that many investors believe has baked in most of the good news, including the rollout of a coronavirus vaccine, increased fiscal stimulus and further economic recovery in 2021.
In particular, the risk of higher corporate tax rates could distort investors’ pent-up expectations for a recovery in earnings growth next year.
According to FactSet data, earnings for S&P 500 index companies SPX,
they are expected to rise by 22.1% next year, after a 13.6% decline in 2020, which would be the largest year-on-year profit jump in a decade.
“We cannot book those earnings expectations now. They should not be taken as gospel, ”said Reynolds.
But others are more skeptical about whether the senatorial run-offs have the potential to generate volatility in the stock market.
They argue that even if Democrats achieve a narrow majority in the Senate, a Biden administration still struggles to move forward with more ambitious points on the policy agenda.
Indeed, to rally the necessary votes to raise taxes on businesses could prove a difficult task, far more than approving a new tax relief package, said Nomura chief economist Lewis Alexander, who expected the corporate tax rate to be at 21%. stay.
Therefore, some feel that the recent market stall in next week’s election reflects how investors expected few legislative surprises, even if Democrats won both Senate seats in Georgia.
The Dow Jones Industrial Average DJIA,
Up 7.25% in 2020, while the S & P500 index SPX,
ended with 16.26% and the Nasdaq Composite COMP,
achieved 43.64%.
“It’s hard to imagine moderate Democrats siding with progressives to change the filibuster rules or stack the Supreme Court,” Michael Arone, chief strategist of State Street Global Advisors, told MarketWatch.
Looking ahead, investors will have to play a busy economic role in the first week of the new year. ISM gauges for manufacturing and services for December, weekly unemployment benefits, trade deficit in November and most importantly, the official December employment report will be released next week.
Few companies will disclose their earnings in the coming week Still, Micron Technology MU,
Walgreens Boot Alliance WBA,
Constellation Brands STZ,
Bed, bath and beyond BBBY,
are among the few companies that will report results.