By William Watts and Sunny Oh
U.S. stocks finished higher Tuesday as investors focused on a pair of runoff elections in Georgia, given the possibility of a more aggressive fiscal policy to combat the coronavirus pandemic should the Democrats win control of the Senate.
Investors were also monitoring the spread of COVID-19 as a more transmissible variant of the pathogen leads to stiffer lockdowns in parts of the world which resulted in a poor start to the year for stocks on Monday.
On Monday , stocks fell to start trade in 2021, with the Dow, S&P 500 and the Nasdaq Composite falling more than 1%. The Dow and S&P saw their sharpest daily drops in almost 10 weeks.
In Georgia, Democratic challengers Jon Ossoff and Raphael Warnock are facing off against Republican Sens. David Perdue and Kelly Loeffler, but the results may not be known for several days.
Betting markets and polls were signaling some confidence in the Democratic Party’s prospects which could result in some repeal of corporate tax reductions and other measures that could weigh on stocks, market strategists said. However, a Democratic win also could lead to another large round of economic aid to boost the economy.
“If the Democrats win both runoff elections in Georgia this would open the door to a large fiscal stimulus package and more expansive fiscal policy in the coming years. Part of this will likely be financed by higher taxes somewhere down the road,” said Philip Marey, senior U.S. strategist at Rabobank, in a note.
If Republicans win at least one of the seats, Senate Republicans will likely block further fiscal stimulus and crimp any Democratic plans for expansive spending after President-elect Joe Biden takes office, Marey said.
“Consequently, there will be more pressure on the Fed to provide monetary stimulus during the course of 2021 if the economic recovery falters,” he wrote.
Republicans currently have a 51-48 majority in the Senate. If Democrats win both Georgia races, the party will gain control because Vice President-elect Kamala Harris would cast tiebreaking votes. If Republicans win one of them, the GOP will maintain its majority.
“As we stated yesterday, the chances of the Democrat’s taking control of the Senate in a tied majority scenario have risen,” wrote Peter Cardillo, chief market strategist at Spartan Capital Securities. “However, while we expect the GOP to maintain control by slim margin the political uncertainties will likely keep the market defensive,” he wrote.
The vote comes as the U.S. counted at least 196,386 new COVID-19 cases on Monday, and at least 2,047 people died, according to a New York Times tracker. Meanwhile, A highly contagious strain of COVID-19 recently discovered in the U.K. also has been found in California and other parts of the U.S., including New York, after the U.K. on Monday announced a new, stricter lockdown in the country.
Meanwhile, in a separate development that might have implications for U.S.-listed China stocks, the New York Stock Exchange reversed its decision to delist a trio of Chinese stocks : China Mobile Ltd., China Telecom Corp. and China Unicom Ltd. The NYSE’s delisting plans, which had been set to take effect next week, followed an order that had been signed by President Donald Trump in November.
In U.S. economic data, the Institute for Supply Management said its manufacturing index rose to 60.7% in December from 57.5% in the prior month, marking the highest level in almost 2½ years. Economists surveyed by MarketWatch had forecast the index to total 57%. Readings over 50% indicate growth.
Cleveland Federal Reserve President Loretta Mester told reporters Tuesday that the central bank could c ontinue its $120 billion per-month asset purchases through all of 2021 even if the economy improves in the second half of the year.
Energy stocks (S&P:XX:SP500.10) were a highlight Tuesday with the sector up 4.5%, the biggest one-day jump since Dec. 4, after Saudi Arabia agreed to voluntary production cuts in February and March. Chevron (NYS:CVX) rose 2.7%.