Within the first week of the brand new yr, politics would be the principal catalyst
Traders work on the trading floor of the New York Stock Exchange.
Stocks are leaving 2020 with strong gains and tailwinds, but as the new year begins, the market could face its first major challenge.
The final result of the 2020 election will be announced on Tuesday, when voters in Georgia select their senators and decide which party controls the U.S. Senate.
With President-elect Joe Biden in the White House and a Democrat-controlled House of Representatives, Wall Street was content with the view that Biden and the Democrats could not succeed in tax increases and more progressive policy changes while the Republicans held the Senate.
Tuesday's runoff for the two Senate seats is expected to result in either or both of the incumbent Republican senators retaining their seats. But the Democrats are close in the polls and should they win, each party would have 50 seats with the tie-breaker elected Vice President Kamala Harris.
"Georgia is the most important thing for the Biden presidency for the next two years," said Ed Mills, policy analyst for Raymond James in Washington. "It will determine what the legislative agenda is and who can be ratified by the United States Senate."
Senator David Perdue will be challenged by Democrat Jon Ossoff, while GOP Senator Kelly Loeffler will face Democrat Raphael Warnock. None of the candidates had more than 50% of the vote in the November 3rd elections, so Georgian law requires a runoff between the two leading candidates for each seat.
"It's a binary event," Mills said, adding that it is of growing interest to the markets. "The general sense of the market is that Republicans are well positioned to hold their majority in the Senate. But I think the 2020 election, as well as the 2016 election, and to some extent the 2018 election, humiliated us … The results the Senate in particular seem less predictable than almost any other election. "
Mills said it could take several days to figure out the results, adding to the uncertainty the event could bring to markets. According to an RBC investor survey, 88% expect Republicans to stay in control, and most say it is positive for the stock market.
"The market tends to shoot first and ask questions later. There will certainly be a reaction if Democrats win both seats," said Peter Boockvar, chief investment officer for the Bleakley Advisory Group. Strategists say there could be a relief rally if Republican incumbents see a clear victory.
"That totally dominates [trade] because it's about whether we have the status quo or whether we have Democrats who control all parts of Washington and what that means for spending and taxes," Boockvar said. "I think you could see that concerns about taxes overwhelmed all thoughts of the benefits of spending more" by Democrats.
By the numbers
A year of extreme volatility ended in big gains for stocks as the pandemic turned course for markets. The S&P 500 rose 16.3% over the course of the year to finish at 3,756. That gain comes from a 34% decline at the start of the year, followed by a strong rebound of more than 65%. Technology was the big winner of the year, and the Nasdaq rose 43.6% to 12,888.
In addition to the runoff election, the market will be watching a stream of data over the coming week, including the key job report from December on Friday. This could show fewer than 100,000 jobs were created as the spreading virus affected hiring and layoffs. 245,000 jobs were created in November.
There are also ISM manufacturing dates on Tuesday and a number of Fed spokesmen including Vice Chairman Richard Clarida on Friday.
The virus itself could also be a contributing factor to stocks.
Conventional wisdom for the coming year was that vaccines will be widespread and in the second half things will return to normal and the economy will recover. The initial distribution, however, was slow and well below the 20 million that President Donald Trump's task force was targeting for December.
In this recent RBC poll, three-quarters of investors were optimistic about vaccine distribution. 80% expected the majority to be vaccinated by the end of 2021. "We suspect that the positive outlook for the stock market and economy would worsen if expectations for a smooth vaccine rollout are not met," wrote RBC strategists.
They also found that almost 60% of the investors surveyed consider high stock market valuations to be problematic.
"This suggests that any threat to economic and earnings recovery history could spark profit-taking. On this point it should be noted that the vaccine was the main problem keeping investors on their toes at night, closely followed by monetary policy and excessive optimism about it the recovery, "stated the strategists.
Chris Rupkey, chief financial economist at MUFG Union Bank, said investors will also watch the formal adoption of the vote by the electoral college on Wednesday. Strategists expect the vote to confirm Biden's presidency.
However, Missouri Senator Josh Hawley says he will challenge the certification, and several House Republicans have already vowed to contest the election at the time. If a House member and a Senator jointly object to a state's electoral roll, the two Congress Houses must debate and vote separately on the objection.
Strategists see little chance of having an impact on the election result, but there could be fireworks. Trump has claimed there was fraud since the election, but several courts have failed to find truth about the allegations.
Rupkey said investors are not considering enough potential for political risk due to the deep hostility between the two political parties.
"I think the additional stimulus and hopes for additional stimulus and infrastructure spending in 2021, I don't know that this is such a blast because of the political instability," he said.
Calendar for the week ahead
9:45 a.m. Manufacturing PMI
10:00 am construction expenses
10:00 am Charles Evans, President of the Chicago Fed
12:15 p.m. Loretta Mester, Cleveland Fed President
6:00 p.m. Mester from Cleveland Fed
10:00 am ISM production
3:45 p.m. John Williams, President of the New York Fed
3:45 p.m. Evans at the Chicago Fed
8:15 am ADP salary data
9:45 am Services PMI
10:00 a.m. factory orders
2 p.m. Fed Minutes
8:30 am Initial claims for unemployment benefits
8:30 a.m. international trade
9:00 a.m. Philadelphia Fed President Patrick Harker
10:00 am ISM non-production
11:00 am James Bullard, President of the St. Louis Fed
1:00 pm. Evans of the Chicago Fed
3:00 p.m. Mary Daly, President of the San Francisco Fed
8:30 a.m. Employment Report
10:00 a.m. wholesale
11:00 am Richard Clarida, vice chairman of the Fed
3:00 p.m. consumer credit