After the elections in November, Wall Street put predictions of a “blue wave” aside. Now, investors are once again reckoning with the possibility that for the next two years, Democrats could control both chambers of Congress and the White House.
What’s happening: CNN projects that Rev. Raphael Warnock will defeat Republican Sen. Kelly Loeffler, while the race between Republican Sen. David Perdue and Democrat Jon Ossoff remains too close to call.
Wall Street, however, is acting like an Ossoff win is likely, as investors scramble to readjust their portfolios. Nasdaq futures were last down 2.2%, while the yield on benchmark 10-year US Treasuries jumped above 1% for the first time since March.
Since November, investors have been betting that government in Washington would remain divided, restraining more ambitious Democratic policy efforts that could hit corporate earnings and the stock market.
But with Democrats closing in on 50 seats in the Senate, that calculus is changing.
“Markets seem to be fussing that a Democratic sweep in the Georgia Senate election runoffs will lead to higher taxes, tech regulation, a sharper environmental focus and bigger moves towards wealth redistribution,” Axi chief global market strategist Stephen Innes said.
Concerns about a crackdown on the tech sector are front and center. Facebook’s stock is off 3% in premarket trading, while shares in Amazon, Apple and Google parent Alphabet are all down more than 2%.
The extent of the risk, however, remains up for debate. Alec Phillips, chief US political economist at Goldman Sachs, pointed out Wednesday that 60 votes will still be needed for most Senate legislation. Bipartisan support “would still be necessary to pass legislation on issues like infrastructure, a minimum wage increase, tech regulation and environmental policies,” he said.
“While change is in the air for the US, changes in US legislation may not be very radical,” Berenberg chief economist Holger Schmieding told clients, noting that more progressive bills may fall flat with moderate Democrats.
Plus, a “blue wave” is expected to unleash another round of stimulus spending to support the economy during the pandemic — a big positive for markets. Phillips said Goldman Sachs has penciled in another $600 billion package “in the near-term” under this scenario.
