The U.S. election has become the number one concern on Wall Street. And the day to decide the winner, finally coming!
And the market has already begun to react: this Monday the three major U.S. stock indexes quickly turned down in early trading, all down more than 2% during the day, closing down more than 1%, the S&P hit the biggest drop in the first trading day of the New Year in five years.
Some commentators believe that the key U.S. state – Georgia’s Senate election is the driving force behind the U.S. stock plunge.
01
Why is Georgia’s runoff election so important?
On Tuesday, January 5, local time, Georgia will hold the second round of the two rounds of U.S. Senate elections, the results of which will determine who can become the majority party in the Senate, Democrats and Republicans.
For the market, if the Senate is controlled by the Democratic Party, President-elect Biden’s administration is likely to successfully promote the initiative to increase corporate taxes, when corporate earnings and stock prices will face some pressure, the future of high-growth technology stocks may not be too good days.
FactSet previously showed that S&P 500 companies in 2020 earnings are expected to decline by 13.6% year-on-year, but in 2021, this earnings are expected to increase by 22.1% year-on-year, or the largest increase in a decade.
What is clear is that the risk of a corporate tax hike is likely to dampen investors’ expectations for a rebound in earnings growth next year.
But a Democratic victory could also boost U.S. stocks. The reason for this is that, despite the billions of dollars that Congress has spent last year, Biden, who has pushed for more stimulus, has raised market expectations that more aggressive fiscal policies will be introduced this year.
Perhaps as Glenmede investment strategy officer Michael Reynolds said, “If we have access to larger fiscal stimulus, raising corporate tax rates will follow, and investors need to balance the two,” which is why the market is so concerned about the runoff.
02
Election may trigger the downside of U.S. stocks?
Commentary suggests that senatorial elections in key U.S. states were behind Monday’s plunge in U.S. stocks.
Bloomberg senior market editor and market commentator John Authers noted that there have been few polls on the election for Georgia’s Senate seat in the past two months, with most results depending on voting during the winter epidemic, and projections from political forecasting site Predictit show close support for Democratic and Republican contenders in the state.
Predictit data shows that the chances of Democrats taking control of the Senate have risen significantly in recent days to just under 50 percent. authers believes that such results are not expected by investors’ current position layouts, so this could lead to market disruption.
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, also warned Monday that a sharp correction in U.S. stocks is imminent, that risk-reward in U.S. stocks has deteriorated significantly, that conditions are ripe for a market pullback, and that the Senate race in Georgia could trigger a downside in U.S. stocks.
03
Timing variables: perhaps not able to produce results that night
The final election results were originally scheduled to be announced on January 5, however, this election is now likely to be like the general election in early November, with the results dragging on for a few days or weeks before they are available.
Data from last Dec. 31 showed that early voting in Georgia had exceeded 2.3 million, including 802,000 returned mail-in ballots and more than 1.5 million people who voted in person at polling places.
A local Georgia official previously said the state wanted counties to be able to process all mail-in ballots received through Jan. 5 so that all they had to do on Election Day was process ballots that arrived by 7 p.m. that day.
But that seems unlikely, especially given the tight race between the two groups of candidates in this runoff, which will likely be slow, and the same operation on presidential election day in November, which will still take several days to process last-minute ballots.
As mentioned many times before, the Republicans and Democrats have now won 50 and 48 seats respectively, leaving two seats in Georgia without a final destination. If the Democratic candidate takes two seats, then the tie-breaker scenario will have the vice president as Senate president, meaning the Democrats will take control of the Senate with this 1 vote advantage.
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