Raphael Warnock, center, and Jon Ossoff attend a rally in Garden City, Georgia, Dec. 19.
Photographer: Colin Douglas Gray / Bloomberg
Photographer: Colin Douglas Gray / Bloomberg
Investors are not yet ready to leave behind this chaotic year. There is a more persistent risk event: the last races of the 2020 elections that have been extended to next year.
While not as pronounced as the coverage seen during election day last month, options and volatility futures show high concern about potential market turmoil resulting from January 2 race results. in Georgia who will determine whether Republicans retain control of the Senate.
Prior to the November vote, many saw the democratic balance of the election as one of the most bullish results possible for U.S. stocks. However, since then, the market has shown that it has become comfortable with a potential continued shared control of the government, a backdrop that has historically produced strong returns.
“There’s no doubt, if you go from red to blue, you’ll have to appreciate something that seems less favorable because markets like blockchain and markets that enjoy the status quo,” said Phil Camporeale, CEO of multi-asset solutions for JPMorgan Asset Management.
The focus on runoff – and the demand for coverage to protect itself from the aftermath of the turmoil – focuses on uncertainty about how investors should position themselves exactly ahead of Joe Biden’s presidency. It needs Democratic control of the Senate to run it on an agenda that will drive green energy companies at the expense of fossil fuel producers, while likely leading to more economic relief packages and infrastructure spending. However, it could also help raise the corporate tax rate and intensify regulatory control.
“It is impossible to overstate the importance of these elections for the size, scale and speed of fiscal, fiscal and regulatory policy of 2021,” Cowen analyst Chris Krueger wrote in a note on December 21st.
Hedges in Place
There are potential winners and losers in both scenarios and it is debatable what would be a better scenario for the overall stock market in the long run. But traders appear to be hedged against the volatility that could erupt in the short term if Georgia’s results cause investors to pile on the perceived beneficiaries of the result and dump the perceived losers.
The coverage probably also reflects the concern that even small surprises could create turmoil in an equity market that needs the general public to continue investing after a spectacular run. The S&P 500 has risen 65% from March lows, with an assortment of valuation metrics at its peak in a decade or more.
“The idea that fiscal policy and public procurement could matter more than revenue and revenue, seems very similar to 2020, right? – is instinctively uncomfortable and supports higher-than-normal volatility that persists,” wrote Julian Emanual, strategist in BTIG brokerage stocks, in a recent note.
Biden’s actions will have history and food, not much else
The runoff in Georgia was unleashed after no candidate for both seats in the state Senate won a majority of the vote. Republican David Perdue is running for re-election against Jon Ossoff, while Senator Kelly Loeffler faces Democrat Raphael Warnock. Polls show strong competition between Republican and Democratic candidates, while the PredictIt betting market shows a small advantage for Republicans. President Donald Trump’s last-minute demand for larger payments to Americans as part of a Covid-19 relief package is also a wildcard that could affect the vote.
The proximity of the races has prevented investors from having too much confidence in what they could expect in the first part of a Biden administration. If Democrats win both races, it gives them control of the Senate with the help of the tiebreaker votes of President-elect Kamala Harris. (Two independent senators meet with Democrats.)
“We see that both elections are too close to the calls,” said Tom Hainlin, strategist for U.S. wealth banking’s Ascent Private Wealth Group, adding that “some short-term market volatility is possible.” after the vote if Democrats take both seats.
Evercore ISI strategists say the Cboe volatility index futures curve remains “remarkably strong” due to Georgia events, similar to the November racing situation.
The VIX futures curve as of December 23rd
Meanwhile, the S&P 500’s monthly sales slopes, or a measure of the cost of bearish options, stood at the 92nd percentile of a historic range, according to data collected by Nomura Securities. “The focus becomes protection after a great hell, and ahead of the risk of macro-regime change arising from the upcoming elimination of the Georgia Senate,” wrote Charlie McElligott, a strategist among several Nomura assets. , in a recent note to customers. .
Many in the market assume Republican candidates will hold both seats, said Ryan Detrick, chief market strategist at LPL Financial, so any surprise “could upset the apple cart.”
Annoying things
LPL research has shown that a divided Congress has historically been good for the stock market; in the last seven decades, the S&P 500 has returned an average of 17.2% annually when power was shared between the two parties. This compares to a 10.7% advance when Democrats were in the lead and 13.4% with Republicans in the lead in both houses.
The activity is too warming in the Treasury options market, highlighted by an opposite bet that emerged Monday at the end. The bet was against the potential for aggressive fiscal stimuli that would drive a defeat along the bond market and must be paid if there is a limit of some basic return around 10 basis points from current levels during about the following month. the bet leans against an issue that has been gaining strength in Treasury options: that the sale of Georgia could trigger a strong sell-off in Treasuries.
The Treasury Options market emerges as Georgia’s runoff approaches
Of course, many on Wall Street don’t expect Georgia’s races to change too much. A meager majority in the Senate for Democrats may not necessarily mean the immediate introduction of new policies, including the renewal of tax rates, according to Art Hogan, chief market strategist at National Securities Corp.
“I just don’t think he’s playing on this idea of,‘ My God, immediately raise taxes on corporations and grand changes. ’I think it’s a lot more of a centrist mindset that we can have some gradual changes,” Hogan said over the phone. “The market narrative also changed pretty quickly, after the election, saying,‘ Hey, wait a minute, we didn’t get it. Blue Wave, but we have a new president, and with that, there will probably be a quieter presence around international relations, tariffs and trade, and more normalization. “I think the market has settled on this concept.”
– With the assistance of Lu Wang and Sarah Ponczek