On January 5, 2021, voters had lined up since morning to cast their ballots in a US Senate run-off election at a polling station in Maritta, Georgia.
Mike Seger | Reuters
If Georgia voters surprise the market by electing two Democratic senators in Tuesday’s runoff election, bond yields could immediately be high and stocks may be closed.
Stock markets, however, may see investors as reducing the risk of tax against the prospect of greater government spending to boost the economy. Some strategists say that this may not prove to be negative for the market in the long run and there may be another major rotation towards stocks that will do well with more fiscal stimulus and infrastructure spending.
“If I turn out to be a complete Democrat, I think the market initially reacted badly to this,” said James Paulsen, Chief Investment Strategist at Leuthaud Group. “I don’t think it’s going to end the bull. … Ultimately, we’re going to get a catalyst to bring about an improvement anyway, and it could happen. There are a lot of people out there who think that This is a positive. Because it can bring in more fiscal juice. “
Paulsen said that if the market responds positively to the ability of more stimulus, growth stocks could lag behind. “You move towards price, cyclical, small cap, and international for that matter. … It would also probably weaken the dollar,” he said.
Tuesday’s race pit Republican David Perdue, whose Senate term ends on Sunday, with Democrat John Osoff and Republican Sen. Kelly Loeffler against Democrat Rafael Warnock. The election is important because it will determine which party controls the Senate, and how easy it will be for President-Elect Joe Biden to push through his policies. It was widely expected that Republicans would continue with a majority, winning at least one of the two Senate seats.
But elections are close, the betting market’s prospects have narrowed, and the market is panicking. If both Democrats win, each party will have 50 Senate seats and Vice-President-Elect Kamala Harris will act as a tie-breaker in any vote.
“[Historically] Wells Demogo’s director of rates, Michael Schumacher, said the stock goes down if there is a Democratic sweep some day. I think stock calls are tough, but bond calls are easy in a way. … bonds people spend more, bigger losses, more [Treasury] Supply. “
With the yield of the 10% Treasury exceeding the psychological limit of 1%, interest rates should push higher. Schumacher expects that if the Democrats win, the benchmark Treasury yield will be closer to 1.05%.
Treasury yields were up 0.96% with a 10-year gain on Tuesday. Yields run contrary to price. After Monday’s big sell-off, the S&P 500 was up nearly 1%.
“Democrat control of the Senate is still a long shot and tax is unlikely to be changed by Democrats even with a 50-seat majority (with Harris’ tie-break vote), given that mid-2022- How many Dams face a difficult election in term, ”noted Evercore ISI strategist. “One thing is very clear, however, if Democrats win GA, more excitement is coming and 10yr yield and price stocks will be higher.”
Georgia runoff was required because no candidate had more than 50% of the vote in the November 3 election.
Regardless of which party wins, incentive spending is expected, but Democrats will approve a much larger plan. But there is a debate about how much and when Democrats would press for higher taxes, if they had control.
“I think the likely outcome would be a water-down biden agenda, if they have a sweep,” said Andy Lepriere, head of policy at Cornerstone Macro. Lepreier said he hopes a tax increase could be on the agenda this year, and that he will pass the Senate and howl by the House.
Lepriere said he expected the corporate tax rate to go from 21% to 25% and that the tax rate for the wealthiest Americans would go from the earlier 37% to 39.6%. He also expects capital gains taxes on dividends and a small increase in taxes.
If the Democrats win, LaPerriere hopes to push Biden through a $ 2 trillion spending plan, but if the GOP continues the majority, there will be no tax increases and the spending plan will be too small.
“I think alternative energy and infrastructure are winners, if Democrats win,” said Lepreier. “Tech companies that play lower tax rates and pharmaceutical companies are losers. More likely, Democrats will reduce reimbursement rates.”
In addition to the Georgia election this week, politics will be in the headlines as some Republicans in Congress challenge the Electoral College vote on Wednesday. The strategists hope to debate the joint meeting of Congress and then confirm the Electoral College vote for a majority Biden.
Depending on the outcome in Georgia, a potential nerve could add more stress to the market.
– Michael Bloom of CNBC contributed to this report.