Wall Street Hopes Democrats Lose Georgia Runoff Elections, But Here’s What Investors Should Expect If They Pull Off A Win

Topline

Wall Street firms agree that markets have largely priced in Republicans winning at least one of the Georgia runoff races on January 5, thereby retaining control of the Senate, but if Democrats clinch the two victories needed to let Vice President-elect Kamala Harris cast a tie-breaking vote, markets could be in for an unraveling as investors put more emphasis on the incoming administration’s policy agenda.

Key Facts

While polls for both Georgia races have tightened since early November, betting markets still place Republicans’ chances of retaining Senate control at 73%, compared to 90% immediately after Election Day, wealth advisory Glenmede said in a note Monday, also warning that “investors shouldn’t entirely write off the alternative.”

“The prospects for aggressive stimulus and bold fiscal initiatives greatly increase” if Democrats flip the Senate, StoneX Macro Strategist Vincent Deluard said Wednesday, particularly with regards to student loan forgiveness, sweeping climate legislation (dubbed a “Green New Deal”) and heightened relief for state and local governments (a Democratic sticking point in stimulus negotiations that lost its legs in the current bill).

The “most immediate consequence” of Democrats taking control would be increased fiscal stimulus in the realm of $300 billion to $800 billion (in addition to the current bill), Goldman Sachs estimated in a recent note.

Democratic Senate control “could also renew fears of increased corporate taxes and regulation,” Goldman analysts Dominic Wilson and Vickie Chang added, though they expect the best-case, one-vote lead for Democrats would likely result in a corporate tax rate about halfway between Biden’s proposed rate of 28% and the current rate of 21%.

Which stocks would get a boost? Goldman expects equity markets would still move higher if Democrats clinch two wins, lifting international indexes like the Eurostoxx 50 and Germany’s DAX the most since they benefit from the cyclical boost of stimulus without the tax risk posed to U.S. firms.

Meanwhile, stocks in the Russell 2000, a measure of small-cap firm performance currently at an all-time high, would likely outperform other U.S. indexes thanks to additional small business aid, while the tech-heavy Nasdaq’s recent underperformance would likely get worse, the analysts noted.

Tangent

Polling site FourThirtyEight currently has the two runoff races as toss-ups, giving Republican incumbent Sen. David Perdue just a 0.5% winning margin against Democrat Jon Ossoff, and Democrat Raphael Warnock a 0.6% lead against Republican Sen. Kelly Loeffler, who was appointed in January to fill a vacated seat. If Ossoff and Warnock pull off wins, Vice President-elect Harris will get to cast a tie-breaking vote on any proposals split across party lines. 

Crucial Quote

“The market right now cares most about the January 5 runoffs in Georgia, where Republicans are expected to win at least one of the races and keep their majority, although Trump isn’t doing his party any favors,” Vital Knowledge Media Founder Adam Crisafulli said Thursday. “The ongoing lambasting of Georgia’s electoral systems and its Republican leaders will hurt GOP turnout, and the absence of a stimulus bill could weigh on the party too.” 

Key Background

Wall Street experts predicted a blue wave for months leading up to the November election, as polls increasingly pointed to waning support for President Trump and Republicans. A blue wave outcome was expected to hurt industries like big pharma and private insurers but benefit homebuilders (thanks to increased infrastructure spending) and clean-energy providers. Those predictions proved wrong on Election Day, and investors have since witnessed a reversal of gains and losses that they priced into markets under the expectations. Overall, however, Wall Street agrees that a split Congress is the best-case policy scenario for stocks, due largely to the softened threat of increased taxes and corporate regulation, and markets have continued to rally since the election. Two Democratic victories could throw a wrench in those gains.

Big Number

$470 million. That’s how much is set to be spent on advertisements for the Georgia runoffs, according to the New York Times on Wednesday. Billionaire financiers have been among the largest individual backers of super-PACs supporting Republican senators ahead of the runoffs. Blackstone cofounder Stephen Schwarzman and Citadel founder Kenneth Griffin poured $15 million and $10 million into the Senate Leadership Fund, whose one goal is “to protect and expand the Republican Senate Majority,” less than one week after Election Day.

Further Reading

Betting Odds Favor Republicans To Win Senate Seats In Georgia (Forbes)

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