It’s been a wild 2020 to say the least. This year has literally been the best of times, and the worst of times.
(Source: Jill Mislinski)
The year began with a strong rally right up until February 19th’s record high. Then we had the fastest bear market in history, with the S&P 500 plunging 34% in four weeks. Next, we had the strongest bear market rally in history, with the market returning to new record highs five months later. In late October, ahead of the November elections, and with viral cases soaring to record highs, stocks fell 6% in a week, the sharpest weekly decline in March. That was followed by the strongest election rally in US history, helped along by news of two promising vaccines that are expected to arrive by the end of the year. In this year of so many unprecedented firsts, and wild volatility, there is one bit of news that has the potential to once more send Wall Street skidding hard and fast. And unlike most short-term risk factors, this one has a definitive date that investors can circle on their calendars, January 6th, 2021.
Why January 6th Might Be The Day Another Correction Begins
No one can predict exactly what catalysts will or won’t trigger a sudden shift in investor sentiment from bearish to bullish or vice versa. The world is incredibly complex and hundreds of millions of investors with different goals, dreams, fears, and risk profiles are who drive stock prices up and down on any given day. However, the consensus among most analyst firms, including blue-chip economists consensus names such as JPMorgan, Moody’s, Goldman Sachs, UBS, and Bank of America is that right now Wall Street is bullish due to three main reasons. In fact, JPMorgan recently went wrote a note to clients saying that we’re experiencing stock market nirvana due to
- good vaccine news giving investors confidence that the pandemic will end next year
- divided government due to the victory of Joe Biden but the Democrats failure to take the Senate
- the expectation (due to Mitch McConnell saying several times) that more stimulus is coming in early 2021 (though smaller than initially expected)
What this all means for investors is that economists expect the strongest economic growth in 20 years in 2021, and no chance of major regulatory reforms or an increase in corporate tax rates. It’s the best of both worlds, more stimulus to juice the economy, an end to the pandemic, AND mostly the maintenance of the status quo that has made so many investors so rich over the last decade. Goldman recently backed up JPMorgan’s argument, forecasting an impressive 4% rally for stocks by the end of the year, 16% more in 2021, and another 8% in 2022. So why am I warning about a potential short-term correction on January 6th?
The One Thing That Could Spoil The Party Is Just Seven Weeks Away
The runoff elections for Georgia’s two Senate seats present the most significant short-term risk, the bank said. Democratic victories would create a blue-wave election outcome and form a government controlled by Democrats. That “would pose downside risk” by negating the divided-government scenario deemed ideal by the strategists.” – JPMorgan
If Democrats win the GA senate runoffs on January 5th then divided government goes out the window and all the rosy scenarios that have stocks rallying so enthusiastically right now. Of course, JPMorgan isn’t too worried about that potential outcome saying “The risk is likely overstated…since Republicans are largely expected to win at least one of the seats.”
(Source: Real Clear Politics)
The one poll we have about the two senate races that will determine the fate of trillions worth of potential stimulus, taxes, and regulations, shows the GOP likely to narrowly win the final two Senate seats up for grab. However, there are two things to keep in mind.
- Remington Research is a republican polling firm that could be overweighting or overestimating republican turnaround in its poll.
- the 4% margin of error in this poll means that both races are statistically tied
If the Democrats win on January 5th then Wall Street could suddenly be facing:
- a historically overvalued market baking in zero chance of corporate tax hikes
- a stock market that’s pricing in Congressional gridlock, suddenly waking up to a world where the Democrats control all of Congress and the White House
It doesn’t take much for market sentiment to flip from FOMO, or “fear of missing out” to a panicked rush for the exits. However, IF the Democrats do win in GA on January 5th, here’s why any market plunge on January 6th is likely to be a major overreaction. More importantly, it would almost certainly be a chance for you to lock in some fat profits in the rest of 2021 and well beyond.
Why You Should Be Greedy When Others Are Fearful If Democrats Win The Senate In January And The Stock Market Freaks Out
70% to 80% of market trades are not made by irrational humans, but even more irrational algorithms. These are computer programs that scan headlines and social media and act first and ask questions later.
Short-term market sell-offs often feed on each other with panicking investors dumping stocks due to algorithm induced selling, and then algos selling more because stocks fall through technical indicators. The basic idea that a “Democratic Government will be terrible for stocks” is one of those overly simplistic ideas that sounds good in theory, but is exactly what could generate such strong opportunities for long-term profits for smart investors.
Here’s the biggest reason why I, someone with my life savings in the stock market, have no plans to sell before the GA Senate runoff, and a potential market correction that could be coming right behind it.
Right now Mitch McConnell is the Senate Majority leader and has the final say on what bills do and don’t get voted on in the Senate. According to GovTrack, in 2019, based on the bills he co-sponsored, McConnell was just the 49th most conservative person in the Senate. He’s literally no more conservative than Democratic Senate Doug Jones of Alabama, who just lost his seat. He’s not that much more conservative than Democratic Senators Joe Manchin of West Virginia or Mark Warner of Virginia. He’s even less conservative than Aristona Democratic Senator Krysten Sinema!
Here’s what smart investors know that the computer algos won’t IF the Democrats win the GA Senate runoffs on January 5th.
- 50 seat majority is literally the slimmest majority Democrats could possibly have and still control which bills get VOTED on.
- whether those bills (tax hikes, Green New Deal, major healthcare reform, etc) pass has ZERO to do with what Joe Biden, Nancy Pelosi, or Chuck Schumer want
- the only things that will decide whether any major bill passes a 50 Democrat majority Senate depend on what the most conservative Democratic Senator wants
If Senator Krysten Sinema, who is more conservative than Mitch McConnel, doesn’t want a Green New Deal, it has zero chance of passing. If she is opposed to big tax hikes or sweeping energy reforms that could threaten the budding economic recovery during the worst recession in 75 years, it has zero chance of becoming law.
Effectively, if Democrats win Georgia’s 2 Senate seats in seven weeks (which is not the most likely outcome) then the computer algos will assume “Liberal Chuck Schumer will control the Senate! SELL!”. In reality, the truth is “Senator Sinema becomes the most powerful Senator in America, BUY, BUY, BUY!”
Why? Because Senator Sinema is a conservative Democrat who is passionate about bi-partisanship.
- she is very unlikely to vote for the kind of sweeping liberal reforms that have so many conservatives terrified about the prospects of a Democratic Senate
- she will almost certainly vote for a bigger stimulus bill that Mitch McConnel would allow to get to the Senate floor
In other words, the chances of major tax hikes, and sweeping regulatory reform? They don’t increase significantly if the Democrats win because of Senator Sinema acting like the firewall against progressive liberal policy priorities. What if I’m wrong and Sinema gives into the political pressure Chuck Schumer and his whip would surely bring to bear on her? Then you have Joe Manchin and Mark Warner serving as backups.
- if Democrats lose a single vote in a 50 seat majority Senate they can’t pass a darn thing!
While it may be speculative to try to read the mind of any individual Senator and guess exactly how they will vote for any given bill, it’s not speculative at all to assume that three conservative Democratic Senators are likely to drive progressives absolutely crazy in 2021 and 2022.
Biden wants to crush US energy (which he actually doesn’t)? Do you think Joe Manchin from coal and fracking state West Virginia will stand for that? Single-payer healthcare have you worried about your healthcare stocks? It’s almost certain that one of these three Democratic Senators will vote no on that (because not even Biden actually supports single-payer). Biden winning the Peach State by the slimmest of margins was the first time GA has voted for a Democratic president since 1992. We can’t discount the fact that, while Republicans are LIKELY to win those seats, they may not. But fortunately for anyone terrified of the prospects of unified government leading to “full-blown socialism” the realities of how the Federal government actually works, makes that doomsday scenario all but impossible. And what if I’m 100% wrong about Manchin, Warner, and Sinema? Well, you have a 6-3 conservative Supreme Court that is almost certain to strike down anything that’s even close to actual socialism. The point is that IF the Democrats do take the Senate, the market would likely overreact, and possibly very badly. Knee-jerk reactions are wonderful opportunities to buy quality blue-chips at bargain prices.
Right ahead of a likely bigger stimulus deal that would drive even stronger economic growth. In a year when several 90% to 95% effective vaccines could end the pandemic, and lead to a great year for undervalued stocks whose actual risks from a Democratic Senate are far, far smaller than the market may initially fear.
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SPY shares were trading at $356.05 per share on Thursday morning, down $0.23 (-0.06%). Year-to-date, SPY has gained 12.21%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Adam Galas
Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...
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