/Here’s what’s at stake for markets in the Georgia Senate runoff elections
Here's what's at stake for markets in the Georgia Senate runoff elections

Here’s what’s at stake for markets in the Georgia Senate runoff elections

Voters line up early in the morning to cast their ballots in the U.S. Senate run-off election, at a polling station in Marietta, Georgia, U.S., January 5, 2021.

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If Georgia voters surprise the market by electing two Democratic Senators in Tuesday’s runoff election, bond yields could immediately go higher and stocks could sell-off.

The stock market, however, could seesaw as investors weigh the risk of tax increases against the prospect for more government spending to boost the economy. Some strategists say it may not prove negative for the market for long, and there could be another big rotation toward the stocks that would do well with more fiscal stimulus and infrastructure spending.

“I’m kind of negative on it if it turns totally Democrat. I think the market has a bad reaction to that initially,” said James Paulsen, chief investment strategist at Leuthold Group. “I don’t think it’s going to end the bull…Eventually, we’re going to get a catalyst to create a correction anyway , and that could be it. There’s a lot of people out there that think it’s a positive because it could bring more fiscal juice.”

Paulsen said if the market does react positively to the potential of more stimulus, growth stocks could lag. “You move toward value, cyclicals, small caps, and international for that matter…It would also probably weaken the dollar,” he said.

The election is critical since it will determine which party controls the Senate, and how easy it will be for President-elect Joe Biden to push through his policies. It was widely expected that Republicans would continue to hold the majority , with at least a win of one of two Georgia Senate seats.

But polls are close, betting market odds have been narrowing, and the market is getting nervous. If both Democrats win, each party will have 50 seats and Vice President-elect Kamala Harris would then act as tie-breaker.

Rates higher?

Higher taxes?

Regardless of which party wins, stimulus spending is expected but Democrats would approve a much bigger plan. But there is debate about how much and when Democrats would press for higher taxes, if they did have control.

“I think the likely outcome would be a watered down Biden agenda, if they have a sweep, said Andy Laperriere, head of policy at Cornerstone Macro. Laperriere said he expects tax increases could be on the agenda this year, and they would likely pass the Senate and squeak by the House.

Laperriere expects the corporate tax rate would likely go to 25% from 21%, and the tax rate for the wealthiest Americans would go from 37% back to the prior 39.6% level. He also expects a slight boost to capital gains taxes and taxes on dividends.

If Democrats win, Laperriere expects Biden to push through a $2 trillion spending plan, but if the GOP continues to hold the majority, there would be no tax hikes and the spending plan would be much smaller.

“I think alternative energy and infrastructure are the winners if the Democrats win,” said Laperriere. “Tech companies that play low tax rates and drug companies are the losers. It’s more likely the Democrats would reduce reimbursement rates.”

Besides the Georgia election this week, politics will be in the headlines as some Republicans in Congress challenge the Electoral College vote Wednesday. Strategists expect the joint meeting of Congress will hold debates and then a majority will affirm the Electoral College vote for Biden.

Depending on the outcome in Georgia, that could add more tension to a potentially nervous market.

Michael Bloom contributed to this report