A handful of toss-up U.S. Senate races this week could hold the key to whether the stock market glides through the year-end in a typical post-midterm election rally or gets hit with a fresh bout of volatility.
U.S. investors appear less concerned with whether Republicans take control of the Senate, as expected, or Democrats hang on to their majority by a slim margin. They just want to know — come Wednesday morning — the actual outcome.
“If we have a really uncertain situation, where the Senate is divided and candidates are threatening recounts, that’s really not good,” said Robbert van Batenburg, director of market strategy at Newedge USA LLC in New York.
In two southern matchups — Louisiana and Georgia — polls show the races are too tight to call, raising the potential for run-off elections that could delay for weeks knowing who will control Congress’ upper chamber. Louisiana’s run-off election is scheduled for Dec. 6.
In the market’s worst-case scenario, the majority party may not be known until after Jan. 6, when Georgia will hold its run-off election if no Senate candidate wins at least 50 percent of the vote on Nov. 4.
Such an outcome, while considered unlikely, nevertheless rekindles uncomfortable memories for some of the 2000 presidential election, when George W. Bush’s victory over Al Gore was not confirmed for more than a month after Election Day. That uncertainty contributed to a spike of almost 11.2 percent in the CBOE Volatility index and a 7.6 percent drop in the S&P 500 from Election Day through the Electoral College vote in late December that certified the outcome.
“While the reaction wouldn’t be that dramatic this time, any form of risk could really jolt equities, especially since the Federal Reserve is no longer in the market,” van Batenburg said, referring to the U.S. central bank’s decision last week to end its massive bond-buying program, a stimulus measure which has been credited with boosting equities.
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