“It is impossible to overstate how critical these races are for fiscal, tax and regulatory policy in the next two years,” Chris Krueger, policy analyst at Cowen Washington Research, told clients in a report on Monday.
Until recently, Republicans were expected to maintain control of the Senate by winning at least one race in Georgia.
“Senate control is a 50/50 chance in any direction,” wrote Ed Mills, a policy analyst at Raymond James in Washington, in a note to clients on Monday.
Given the “totally unprecedented nature” of the election, Krueger said: “racing in Georgia is a” bouncing ball “.
Trump call increases uncertainty
“It doesn’t help Republicans at all,” said Greg Valliere, chief American policy strategist at AGF Investments.
He added that Trump’s efforts to cast doubts about the integrity of the election “may have confused” Republican voters in Georgia – just when he needs them to vote.
Investors can also be confused.
However, Wall Street is now gearing up for the possibility that there may be less congestion in Washington than previously thought. And that has positive and negative points for investors.
Stocks fell sharply on Monday and some analysts pointed to the uncertainty about Georgia as one of the culprits for bringing down the previously bullish market.
“The possibility that Kamala Harris will be the tiebreaker in any 50/50 vote makes investors nervous in the short term,” said Lindsey Bell, chief investment strategist at Ally Invest.
Fears of tax increases can be exaggerated
The big fear for investors is that the Republican Party’s losses in Georgia will pave the way for big tax increases that not only erode corporate profits, but also hinder the recovery. In theory, Democrats could use budgetary reconciliation to enact radical policy changes with party votes.
But some analysts say fears of immediate tax increases are exaggerated, given the economic and political realities of the moment.
“I do not feel encouraged in Congress to act quickly on taxes until people are sure that the economy has recovered,” said Valliere.
Keep in mind that a 50/50 draw in the US Senate is hardly the blue wave that progressives have expected. All 50 Democrats would have to pass the legislation – including moderates like Joe Manchin of West Virginia.
“Manchin would not be a stamp for Democrats,” said Valliere.
Michael Cembalest, president of market and investment strategy at JPMorgan Asset Management, agreed that Democrats may find it “difficult” to approve Biden’s tax and spending proposals by a “very narrow” majority in the Senate and the House. He added that Manchin is “ideologically closer to moderate Republicans than to progressive Democrats”.
How much more aid to the economy?
Unlike tax increases, Democrats are likely to unite around legislation that will provide more aid to Covid’s devastated economy.
Late last month, Congress finally passed a $ 900 billion federal aid package that provided aid to small businesses and families.
The worsening pandemic – and the slow start to vaccine distribution – suggest that the economy may well need more help in the coming months. But with Republicans outside the White House, the Republican Party is now signaling concern about the growing federal budget deficit. If the Republican Party maintains control of the U.S. Senate, there may be little appetite for another round of substantive federal aid.
“A Democratic-led Senate could mean that more stimulus is underway to ensure that the recovery gets back on track,” said Ally’s Bell.
Analysts said Biden’s plan is a real possibility if Democrats sweep Georgia. Otherwise, it can be difficult to convince Congress to spend up to $ 1 trillion on infrastructure.
“Investors would see large infrastructure spending as a major positive factor for the market,” said Bell.
All of this explains why Bell is betting that a vending machine on Wall Street instead of a possible sweep by Democrats in Georgia could be a buying opportunity for investors.