Volatility market prepared for Georgia “very close to the call” runoffs

Photographer: Colin Douglas Gray / Bloomberg

Investors are not yet ready to leave this chaotic year behind. There is one more persistent risk event to worry about: the final races of the 2020 elections that have spread over the next year.

While not as pronounced as the hedging seen on election day last month, volatility options and futures signal heightened concern about the potential market turmoil resulting from the results of the January 5 races in Georgia that will determine whether Republicans will retain control of the Senate.

Before the November vote, many considered a Democratic sweep in the elections to be one of the most optimistic results possible for US actions. Since then, however, the market has been comfortable with a possible continuous division of government control – a scenario that has historically produced solid returns.

“There is no doubt that if you move from red to blue, you will have to set the price for something that looks less favorable because of markets that like congestion, markets that like the status quo,” said Phil Camporeale, managing director multi-asset solutions for JPMorgan Asset Management.

The focus on the runoff – and the demand for hedges to protect against turbulence in its aftermath – is centered on uncertainty about exactly how investors should position themselves before a Joe Biden presidency. He needs Democratic control of the Senate to execute an agenda that would boost green energy companies at the expense of fossil fuel producers, while probably leading to more economic aid packages and infrastructure spending. However, it can also help you to raise the corporate tax rate and increase regulatory scrutiny.

“It is impossible to overstate the importance of these elections for the size, scale and speed of 2021 fiscal, tax and regulatory policy,” wrote Chris Krueger, an analyst at Cowen, in a note on December 21.

Hedges in Place

There are potential winners and losers in both scenarios and it is debatable which would be the best scenario for the stock market in general in the long run. But traders appear to be protecting themselves against volatility that could explode in the short term if Georgia’s results cause investors to pile up on the perceived beneficiaries of the result and get rid of the perceived losers.

The coverage probably also reflects the concern that even small surprises could create turmoil in a stock market that needs the general public to continue investing after a spectacular run. The S&P 500 rose 65% from its low in March, with a variety of valuation metrics at their highest in a decade or more.

“The idea that fiscal policy and public procurement can be more important than earnings and revenue – looks a lot like 2020, doesn’t it? – it is instinctively uncomfortable and supports the persistence of above-normal volatility, ”wrote Julian Emanual, stock strategist at brokerage BTIG, in a recent note.

Biden’s shares will have history and food in their favor, not much more