The closeness of the races has kept investors from getting too confident about what to expect in the early part of a Biden administration. If Democrats win both races, it gives them control of the Senate with help of a tie-breaking votes from Vice President-elect Kamala Harris. (Two independent senators caucus with the Democrats.)
“We view both elections as too close to call,” said Tom Hainlin, strategist at U.S. Bank Wealth Management’s Ascent Private Wealth Group, adding that “some short-term market volatility is possible” after the vote if Democrats take both seats.
Strategists at Evercore ISI say the Cboe Volatility Index’s futures curve remains “notably steep” due to the Georgia events, similar to the situation heading into the November races.
Meanwhile, skew in S&P 500’s one-month puts, or a measure of cost in the bearish options, stood at the 92th percentile of a historic range, according to data compiled by Nomura Securities. “Focus turns to protection after one hell of a run, and ahead of the macro-regime-change risk from the nearing Georgia Senate run-off,” Charlie McElligott, a cross-asset strategist at Nomura, wrote in a recent note to clients.
Many in the market assume the Republican candidates will keep both seats, said Ryan Detrick, chief market strategist for LPL Financial, so any surprises “could upset the apple cart.”
Upset Things
Research from LPL has found that a divided Congress has historically been good for the stock market -- over the last seven decades, the S&P 500 has returned an average of 17.2% annually when power was split between the two parties. That compares with an advance of 10.7% when Democrats were in charge and 13.4% with Republicans at the helm of both chambers.
Activity is also heating up in the Treasury options market, highlighted by a contrarian wager that emerged late Monday. The bet was against the potential for aggressive fiscal stimulus to spur a rout in the long end of the bond market, and it stands to pay out if any climb in yields is capped around 10 basis points from current levels for roughly the next month.The wager leans against a theme that’s been gaining momentum in Treasury options -- that the Georgia selloff could trigger a sharp selloff in Treasuries.
To be sure, many on Wall Street don’t foresee the Georgia races as too much of a game changer. A slim Senate majority for Democrats might not necessarily mean an immediate ushering in of new policies, including a revamp of tax rates, according to Art Hogan, chief market strategist at National Securities Corp.
“I just don’t think it’s playing into this idea of, ‘Oh my god, higher corporate taxes immediately and grandiose changes.’ I think it’s much more a centrist mentality that we might have some gradual changes,” said Hogan by phone. “The market narrative shifted pretty quickly, too, post the election, saying, ‘Hey, wait a minute, we didn’t get the blue wave but we’ve got a new president and with that comes probably a calmer presence around international relations and tariffs and trade and more normalization.’ I think the market has settled into that concept.”