Georgia (Still) On My Mind

In the immediate aftermath of the US election, markets cheered what was variously billed as a kind of best-case scenario.

Investors had months to get comfortable with a Joe Biden presidency, and had largely convinced themselves that pro-growth, demand-side stimulus, more predictable trade policy, and diminished “tweet risk” would more than make up for the mechanical downside from higher corporate taxes. Any de-rating in equities on a “blue sweep” would be temporary, many analysts said, as the odds of the Senate and White House both flipping steadily increased.

Then, when it looked like the GOP managed to hold the Senate, markets adjusted the script. Senate Republicans would serve as a “firewall” to higher taxes and re-regulation, while the Biden administration would restore a semblance of normalcy to 1600 Penn. It would be gridlock, and while gridlock can be a disaster for Main Street, it’s often good for Wall Street.

The only question was whether Donald Trump would do something dramatic like, say, declare martial law. Ultimately he didn’t, although the possibility was reportedly raised in the White House this month by the recently-pardoned Michael Flynn.

Meanwhile, vaccine readouts from Pfizer and Moderna were even better than expected. As realized volatility moved lower, the vol-control universe dialed up its exposure, providing a bid for risk. The pro-cyclical trade triumphed in equities, but rates had a hard time breaking sharply higher. That ensured there was no rout in secular growth favorites, which also benefited from surging virus caseloads and new lockdown measures.

Ultimately, November turned into a bonanza for equities of all sorts. While former laggards like small-caps were the standouts, big-tech prospered too. It was one of the best months for global stocks in history.

And yet, through it all, political risk never really receded. In addition to Trump’s belabored efforts to overturn the election, Georgia headed for two runoffs, the results of which would determine the balance of the Senate.

I’ve obviously dedicated a ton on digital ink to Georgia’s tight races, and you can expect the financial media to do the same in the weeks ahead.

Bloomberg, for example, ran a feature piece on Saturday noting that “the closeness of the races has kept investors from getting too confident about what to expect in the early part of a Biden administration.”

In short: If Jon Ossoff and Raphael Warnock somehow manage to best David Perdue and Kelly Loeffler, the market will be forced to rethink gridlock assumptions literally overnight. The latest polling shows Perdue with a slight edge over Ossoff and Warnock maintaining a lead over Loeffler, although as I’m always keen to remind folks, trying to read these tea leaves is pointless. The races are probably close. That’s all one can really surmise at this juncture.

As one strategist reiterated in remarks to Bloomberg, the market still thinks Perdue and Loeffler will win. So, a different outcome could prompt a re-pricing in both rates and equities, even if it proves fleeting.

“SPX and QQQ 1m Put Skew now in ‘light rage’ mode, both at 92%ile, as focus turns to protection after one hell of a run, and ahead of the macro regime change risk from the nearing Georgia runoffs,” Nomura’s Charlie McElligott said, in a December 17 note. He emphasized that the races have “heavy implications for reflation and duration, all as it relates to Democrat policies on fiscal spending, infrastructure, taxation and regulation.”

If 10s are looking for a sustainable move above 1%, a Democratic sweep in Georgia might well do the trick on the read-through for supply, despite the Fed’s intentions to ensure there’s no disorderly backup at the long-end.

“While a WAM extension might be an underlying expectation that creates a ceiling — there is nothing requiring the upper bound to be in the current 94-98 bp range,” BMO’s Ian Lyngen and Ben Jeffery said, in a Christmas Eve note. “In fact, the prospects for a breach of 1.0%, even with this backdrop, remain high and should such a selloff fail to materialize in the final week of 2020, the potential will be just as relevant once year-end considerations pass.”

Early voting in Georgia has seen heavy turnout. “Data released by the office of Georgia’s secretary of state show[ed] nearly 1.9 million voters [had] already cast in-person or mail-in ballots since voting opened last week,” the AP said, noting that amounts to nearly “half of the total early votes cast in the November general election, with less than two weeks left before the Senate runoff concludes.”

Meanwhile, Ossoff and Warnock blew the doors off, raising record amounts this quarter. Ossoff’s haul was almost $107 million, to Perdue’s $68 million. Warnock raked in $103 million, to Loeffler’s $64 million.

“Loeffler has tapped her personal fortune to help fund the race,” CNN reminded the country this week, while noting that Warnock has relied on small donors. Apparently, more than half of his contributions were from people chipping in $200 or less, which gives him scope to raise more. Ossoff had almost $18 million left for the last leg of the race versus Perdue’s $16 million. Ossoff too leaned on small, individual contributions.

The stakes are high. And nobody knows what effect (if any) Trump’s stimulus brinksmanship will have on the races. Frankly, it’s not clear he cares.