If you’re looking for something to worry about coming off one of the best weeks of the year for equities, the specter of renewed political uncertainty is a good candidate.
That may seem like an odd thing to say now that we have the closest thing to certainty we’re likely to get when it comes to the White House, but markets now need to contend with a pair of critical runoffs in Georgia.
Control of the Senate hinges on those runoffs and they aren’t coming until January. If you’re a Republican first and only a Trump supporter second, it’s time to pivot and focus. “Dear leader” is on his way out the door. But the Senate should hold — “should” being the key word. Again, it’s all about Georgia.
Read more: Georgia, Not Donald Trump, Is What Matters For Republicans Now
Markets were convinced last week that a “blue sweep” was off the table, but as Mitch McConnell made clear Friday, it’s not. The GOP has not yet secured control of the Senate.
You can expect markets to start grappling with this reality in the week ahead, even as Democrats’ odds of winning both runoffs seem low.
“Markets generally do not like uncertainty,” Goldman wrote Friday, in the course of emphasizing the importance of the upcoming Georgia runoffs. “The 6% rally in equities since Election Day suggests investors now expect a divided government, reducing the uncertainty associated with the potential for major policy changes,” the bank added.
Since 1928, the median 12-month return for equities under a divided government is 12%. That’s better than the 9% return typical of periods characterized by one-party governance.
With stocks priced to perfection (especially after last week’s mammoth rally), the prospect, no matter how unlikely, of a “blue revival” could potentially take some wind out of the sails, even if it boosts cyclical value and other expressions seen as “blue beneficiaries,” if you will.
Goldman went on to note that in contrast to 2000, it’s “control of the Senate rather than the White House that is the source of the uncertainty, but the policy consequences depending on how the current uncertainty is resolved seem far greater than 20 years ago.”
For reference, the table below from Goldman offers a snapshot of how equities, rates, and volatility behaved in and around the last contested election.
Clearly, that marks a rather stark contrast with what we’ve seen out of stocks thus far following the 2020 vote.
It’s not terribly difficult to imagine some manner of pullback or ebbing of the euphoria once it dawns on market participants that while the White House is poised to be a source of stability for the next four years, we won’t know, for certain anyway, what the tax regime and regulatory environment will look like until the second week of January.
So, is it out of the frying pan, into the fire? Perhaps. But remember that prior to the election, market participants were at peace with a “blue sweep.” The price action often dictates the narrative, not the other way around.
