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Market Strategy 1/04/2021

  • John Stoltzfus
  • January 4, 2021

Georgia on My Mind

As a market denizen we know says, “it’s never easy.”
Key Takeaways
  • The Senate run-off elections in Georgia on Tuesday will be a major focus as market participants look to which party will control the Senate.
  • Should the Democrats win both seats, we expect the S&P 500 to become vulnerable to a downdraft in the neighborhood of 6% to 10%.
  • The first week of the New Year provides a heavy schedule of economic data including the ISM surveys, the nonfarm payrolls report, as well as the minutes from the Fed’s December FOMC meeting.
  • We update our S&P 500 maximum drawdowns table since 1998 to include the 16.26% annual price return for the full year 2020 that came despite the 33.92% downdraft that occurred in the first quarter.    
greetings from georgia

As good as it feels in many ways to have 2020 in the rearview mirror its legacy presents challenges and hurdles that the market will have to contend with as the New Year unfolds.

The central hurdle for the US, the world, and the markets in our view remains the need to stem the spread of the Covid-19 virus and any mutations it might generate. Early glitches notwithstanding related to the initial launch of the first vaccine’s distribution, the earlier than expected regulatory approvals and apparent interest among many Americans in getting the vaccine bring hope for a successful outcome in arresting the virus’s spread over the course of this year.

That said, it will take time to evaluate the effectiveness and acceptance of the vaccines administered over the course of the next two quarters. The length of time that households and economies have been negatively impacted by the spread of the virus across the world in our view will likely result in less resistance to inoculation against Covid-19 than many experts had feared early on in the pandemic. We expect that equity markets will remain sensitive to developments tied to the pandemic that have held the US and global economy hostage for nearly a year.

A nearer hurdle for the markets to consider will be the outcome of the run-off elections for two seats in the US Senate taking place in Georgia tomorrow (Tuesday, January 5). The results of those two races will determine whether or not the Republicans remain in control of the Senate. An historic amount of money has been spent by both sides in campaigning for the two seats with most pundits and pollsters looking for a close vote count to determine the winners.

Quotation from Aenean Pretium

A Democratic sweep of the two run-off elections in Georgia could cause the US equity broad market to experience a downdraft of anywhere between 6% and 10%...

Divided Government Priced In?

From our perch on the market radar screen it appears to us that the equity markets over the past two months have priced in a Republican victory in at least one of the two contests tomorrow. In our experience the markets prefer that Washington’s Capitol Hill have enough checks and balances in place to keep political power out of just one party’s hands.

It is thought by not just a few folks on Main Street as well as on Wall Street that if tomorrow’s run-off results in a sweep for the Democrats--providing them with control of the Senate as well as the House--that it would bode ill for business with the likelihood that corporate tax rates could rise substantially. The Tax Reform Act of 2018 increased the competitiveness of US businesses on a global basis and enabled corporations to keep more of what they earned after taxes. The latter has been considered good for research and development, as well as hiring, and supported dividends for many companies even through the pandemic which continues to have a grip on the US and much of the rest of the world.

In addition, a Democratic sweep in Georgia would likely see a boost in new government program creation and spending at a time when many voters, market participants and business leaders are concerned about the sizeable level of debt that the Treasury has had to take on to provide a financial “bridge over troubled water” via fiscal stimulus to help individuals and businesses stay afloat during these trying times of Covid-19.

Stock Market Could Correct if Dems Sweep

In our view a Democratic sweep of the two run-off elections in Georgia could cause the US broad equity market to experience a downdraft of anywhere between 6% and 10% from where it closed the year last Friday in New York.

Increased uncertainty over taxes and spending could likely weigh on the equity market at least until the intentions of the Biden Administration are given greater definition as to what a new tax regime might look like and how much any expansion of the government and its services would cost.

For now we expect all eyes on Tuesday’s run-off elections in Georgia with increased uncertainty added should closely called elections take weeks to determine the winners. Such an outcome could result in the potential for the equity markets to come “off the boil” near term and to perhaps drift lower as investors ponder while votes are tabulated.

John Stoltzfus of Oppenheimer Asset Managment Inc.

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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