Markets Recover Some Losses, While Eyeing Georgia

This tug of war between good news and bad news can be expected in the early part of this new year. Although Monday witnessed a sharp pullback (and in my opinion, a predictable one), Tuesday witnessed a reversal. In general, though, I still believe that markets have overheated and that between now and the end of Q1 2020, a correction could likely happen.

Markets have overheated, and I believe that much of the good news ranging from economic stimulus to vaccines has been baked in. Eventually, the reality on the ground will outweigh the positive news in the short-term.

National Securities’ chief market strategist Art Hogan put it best in my opinion, saying that he believes we could see a 5%-8% pullback as early as this month. Hogan said that “we have a tug of war between virus news and vaccine news the better part of six months, and that’s been balanced off by stimulus...That seems to be behind us, and right now I think the virus news takes over a little bit.”

Additionally, if the Georgia elections go as I think they’ll go (Democrat sweep), it could be a short-term catalyst leading to a potential correction. The balance of power in the U.S. Senate is at stake with these elections. Investors are likely to prefer a divided Senate. If the Democrats sweep and wrestle away Senate control from the Republicans, it could leave President Biden’s powers largely unchecked, and enable him to pass more ambitious, progressive, and less market-friendly policies.

At the time of this publication, Democrat candidate Raphael Warnock was declared the winner over the incumbent Republican Kelly Loeffler for the first Senate seat up for grabs. The other contested seat between Democrat Jon Ossoff and incumbent Republican David Perdue had yet to be called.

According to John Stoltzfus , chief investment strategist at Oppenheimer Asset Management, the S&P 500 could fall by 10% if the Democratic candidates sweep the Georgia runoffs.

“It is thought by not just a few folks on Main Street as well as on Wall Street that if tomorrow’s run-off results in a sweep for the Democrats — providing them with control of the Senate as well as the House — that it would bode ill for business with the likelihood that corporate tax rates could rise substantially,” Stoltzfus said.

On the other hand, a Democrat sweep could mean potentially larger stimulus packages - and soon. There is optimistic potential, but the road towards normality will hit inevitable speed bumps and uncertainty. This Senate election and the potential market reactions reflect that.

If and when a correction does happen, I believe it will be healthy and a good thing. Corrections are normal market behaviors and happen more frequently than most realize. Only twice in the last 38 years have we had years without a correction (1995 and 2017). Since we have not had one since March 2020, I believe we are long overdue, and the catalysts are there. Most importantly though, a correction could be a great buying opportunity for what I believe will be a strong second half of the year.

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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