The new year was meant to usher in greater certainty, with Covid-19 vaccination efforts ramping up and the US election in the rearview mirror.
Instead, investors are being forced to grapple with fresh lockdowns and the uncertain outcome of Senate elections in Georgia — the result of which could have major ramifications for the US economy.
What’s happening: The S&P 500 and Nasdaq Composite both fell 1.5% on Monday, while the Dow dropped more than 380 points, or 1.3%.
The selloff “suggests that many investors might have made a New Year’s resolution to stay sober, at least for the first day or two of 2021,” Ed Yardeni, president of Yardeni Research, told clients Tuesday.
The broad themes that sent stocks to record highs at the end of 2020 are still intact. Unprecedented support from central banks and governments remains in place, and the vaccine rollout that will eventually feed an economic recovery is gathering steam.
“Fiscal and monetary policy are highly supportive, and financial conditions are very loose,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “We therefore continue to expect strong global growth in 2021.”
In the meantime, however, virus headlines are generating turbulence.
On Monday, UK Prime Minister Boris Johnson announced a third lockdown for England. The nation is grappling with a surge in Covid-19 cases believed to be triggered by a new, more infectious variant. Italy said Tuesday that it’s extending most of the coronavirus restrictions imposed during the Christmas holidays until Jan. 15. German leaders are also discussing an extension of the country’s lockdown.
Meanwhile, hospitalizations continue to surge in the United States, while the vaccination effort is lagging behind targets. Just 4.5 million people have received their first dose, the US Centers for Disease Control and Prevention said Monday. That’s well behind what officials had hoped for by now.
Then there’s the political action in Georgia on Tuesday. Two runoff contests there will determine whether Republicans can keep hold of the Senate.
“It is impossible to overstate how critical these races are for fiscal, tax and regulatory policy over the next two years,” Chris Krueger, policy analyst at Cowen Washington Research, said in a report Monday.
A sweep by Democrats would allow for more ambitious spending programs once President-elect Joe Biden enters the White House. But it would also make corporate tax hikes more likely, which could jolt investors.
A jittery Wall Street thinks the vote could go either way. That means traders, and not just political junkies, will be glued to their TVs tonight.
“The race looks close to a toss-up, albeit with a slight Republican lean,” Goldman Sachs chief US political economist Alec Phillips told clients.
