Political worries about Georgia’s Senate runoff election Tuesday helped fuel a sharp New Year’s stock market selloff on Monday. Analysts say there may be a bigger sell-off if Democrats win than if Republicans prevail.
Apprehension about Georgia’s Senate runoff election Tuesday helped fuel a sharp New Year’s selloff, and politics could continue to unhinge the stock market even after the outcome is known… The runoff for two Senate seats is the final determinant of the 2020 election, and at stake is control of the U.S. Senate. Wall Street has widely expected at least one Republican would win, keeping the GOP in control.
Stocks traded sharply lower on the first trading day of the year, with the S&P 500 and Dow hitting a new record high in early trading before falling sharply.
Traders said there were multiple causes for selling, including concerns about the pandemic, with new shutdowns in the U.K. and the slow distribution of the vaccine in the U.S., as well as political risk and a growing concern Democrats could win in Georgia… The worry for the stock market is that if the two Senate seats are taken by Democrats, each party would have 50 seats but Vice President-elect Kamala Harris would cast the tie vote after she takes office. Biden would then be able to press more of his agenda, including capital gains and corporate tax increases.
“I think the market has priced in the fact that at least one of these two seats is going to a Republican,” Cowen CEO Jeffrey Solomon said on CNBC’s “Squawk on the Street.” “The market definitely likes it where the executive branch and legislative branch are not in the same camp. If it turns out we get two Democrats elected, we’re likely to see some reaction to that…”
“In the event of a Democrat sweep, we would expect a powerful internal market rotation as investors reprice for a high fiscal/some taxes/more green/more regulation outcome than Biden with divided government, with the market likely down on net overall on the day,” the Evercore analysts wrote.
MacDailyNews Take: The market loves gridlock because the market hates uncertainty. Gridlock is much more predictable.
As we wrote back in 2018:
With a U.S. federal government several orders of magnitude larger than any founding father’s worst nightmare, anything that locks it in place, even temporarily, is a Good Thing™.