Georgia on our minds
There's a non-zero risk we're celebrating the crash of the Blue Wave prematurely.
Markets are presently cheering, with us, our early conclusion from the morning after Election Day that the outcome was essentially a draw, with the feared Blue Wave crashing hard against the shores of Maine. However, as several key battleground states continue to receive, process and count votes, the Senate remains undecided. Importantly, assuming Sen. Tillis holds his lead in North Carolina, the race for control of the Senate effectively comes down to the two still-uncalled races in Georgia. With Tillis’ seat, the GOP would be at 50 seats, and could only lose control if both Georgia seats flip and Kamala Harris becomes vice president and with it, the controlling 51st vote in the upper body. With Tillis’ eventual win, along with Biden-Harris’, that leaves the two Georgia Senate races.
While flipping each Georgia seat in a runoff would seem a difficult feat, in the world of 2020 surprises, it is not impossible. With control of the Senate in the balance, the Georgia runoffs would likely attract millions of dollars, perhaps hundreds of millions, into the Peach State from all over the country, and Democrats generally are running nearly 2-to-1 in campaign funding so far this year. Perhaps worse for markets, the runoffs would not be scheduled until Jan. 5, so forward policy uncertainty would hang in the air through year-end.
The Georgia outcome could result in a more uncertain policy outlook for 2021. If the Democrats were to prevail, they would enter 2021 with the slimmest of majorities in both houses of Congress. Not exactly a Blue Wave, but one capable of passing into law at least a watered-down version of the Democratic platform: higher spending (market supportive) and perhaps higher taxes, more regulation and further restrictions on the energy sector (all market negative). And while the probability of such a sudden lurch left in policy remains low at this point, it’s now at least a 20% shot, not zero. As the market digests this and reassesses this probability as the situation in Georgia evolves through the next few days, the post-election honeymoon we’ve been on could end.
We remain optimistic that sooner or later, other, bigger forces will drive markets in 2021 (the end of Covid, sooner or later; continued low Fed rates; and a powerful, synchronized global economic recovery). And in the unlikely but now possible event that a narrow all Democratic government emerges early next year, the resultant higher spending, higher oil prices and steeper yield curve probably would on net be supportive of the value stock trade we see as likely to emerge in any case. So, we are recommending keeping equity overweights intact (particularly in cyclical/value U.S. stocks and international stocks) and stand ready to add to those overweights if volatility picks up again.
In the meantime, we’ve got Georgia on our minds.