The second-round election for two seats in the U.S. Senate in Georgia next Tuesday has the potential to inject volatility into a rising stock market that has largely experienced political turmoil in Washington this year.
Market participants say any complacency among investors can be displaced, since if Democrats win both seats in the Senate, President-elect Joe Biden’s next administration would have control of both chambers of Congress and could move to reverse the corporate tax cuts of 2017, putting the company’s profits and stock prices under some pressure.
However, a Democratic victory can also boost actions by raising expectations for more aggressive fiscal stimulus measures next year, in addition to the billions of dollars already applied by Congress.
Those are the reasons why the second round of elections in Georgia could become a “big deal” for Wall Street, said Michael Reynolds, director of investment strategy at Glenmede, in an interview.
“If we have a chance with a bigger tax package, you will need to balance that with the specter of raising corporate tax rates,” said Reynolds.
Most analysts are predicting a victory for Georgia’s Republican senators, and the PredictIt betting market gives Republicans a 65% chance of remaining in charge of the Senate on Thursday.
But Democratic challenger, Rev. Raphael Warnock, leads current Republican Senator Kelly Loeffler by 1.8 percentage points in a RealClearPolitics polling moving average for one of Georgia’s second rounds. And in the average RCP poll for the other Georgia contest, Democrat Jon Ossoff is ahead of Republican Senator David Perdue by 0.8 percentage points.
Read: Betting markets see Republicans win in crucial Georgia qualifiers, while polls give Democrats an edge
Watch: Trump plans to campaign on Monday in Georgia County with low early voter turnout
Therefore, the outcome of the January 5 races could generate volatility in a frothy stock market that many investors see as having incorporated most of the good news, including the launch of a coronavirus vaccine, more fiscal stimulus and greater economic recovery in 2021.
In particular, the risk of higher tax rates for companies may upset investors’ pent-up expectations of a recovery in earnings growth in the coming year.
According to FactSet data, earnings for firms in the S&P 500 SPX index,
The forecast is for a 22.1% increase next year, after a 13.6% drop in 2020, which would mark the biggest annual jump in earnings in a decade.
“We cannot record these profit expectations now. They should not be taken as the gospel, ”said Reynolds.
But others are more skeptical about whether the Senate election has the potential to generate volatility in the stock market.
They argue that even if Democrats win a small majority in the Senate, a Biden government may still struggle to get more ambitious items on the political agenda.
Indeed, gathering the votes needed to raise corporate taxes can be a difficult task, far more than approving a new tax relief package, said Nomura Chief Economist Lewis Alexander, who anticipated the tax rate would be 21%.
That is why some feel that the recent quiescence of the market in the second round of the elections reflected how investors expected few legislative surprises, even if Democrats won the two Senate seats in Georgia.
The Dow Jones Industrial Average DJIA,
gained 7.25% in 2020, while the S & P500 SPX index,
ended with a 16.26% increase and the Nasdaq Composite COMP,
gained 43.64%.
“It is difficult to imagine moderate Democrats allying with progressives to change the rules of obstruction or to package the Supreme Court,” Michael Arone, chief strategist at State Street Global Advisors, told MarketWatch.
Looking ahead, investors will face a busy economic agenda in the first week of the new year. ISM’s manufacturing and service indicators for December, weekly unemployment claims, November’s trade deficit and, most importantly, the official December employment report will be released next week.
Few companies are expected to announce their earnings next week. Still, Micron Technology MU,
Walgreens Boot Alliance WBA,
Constellation Brands STZ,
Bed, Bath and Beyond BBBY,
are among the few companies that will deliver results.