Market Strategy 1/04/2021
- January 4, 2021
Georgia on My Mind
As a market denizen we know says, “it’s never easy.”
- 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.
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.
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.
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.
Additional Market Insights
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation.
Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2020.