Georgia Runoffs: What Will Happen to Stocks if the Dems Win?

Higher taxes will dispirit investors, but more stimulus might mean a longer, stronger bull run.
Anthony RussoJan 05,2021,20:41

This evening, Georgia is on everyone's mind as residents of the state will have the power to shape Joe Biden’s first two years in office.

As things stand, the Democrats will control the White House and the U.S. House of Representatives later this month. But to retake control of the Senate, Democratic challengers Raphael Warnock and Jon Ossoff will need to defeat Republican incumbents Kelly Loeffler and David Perdue.

Polling shows a tight race that could swing either way. Although polling places close at 7 PM Eastern Time, it may take days until we find out which candidates won.

In the November general election, President-elect Joe Biden won the state narrowly by just under 12,000 votes. However, Perdue beat Ossoff by roughly 88,000 votes but got under 50% of the vote, triggering a runoff.

Democratic Control Could Mean Higher Corporate Taxes

If the Senate lands in Democratic hands but it would help Biden get his desired policies passed through Congress. While Biden is no Bernie Sanders or Elizabeth Warren, part of his agenda includes a rollback of President Trump’s corporate tax cuts, which won't please Wall Street and may spark a selloff.

“That agenda includes corporate tax hikes that, by our estimation, could reduce S&P 500 after-tax earnings by 5%. Yet it also has fiscal stimulus measures that should support growth,” UBS strategist Mark Haefele wrote, as cited by Barron’s today.

He added, “Markets appear to be getting more nervous about this possibility, and may also be worried that in the case of a close election, it could take several days for the winner to be known.”

More and Bigger Stimulus Packages

Fears of tax hikes in itself could cause some selling short-term, but with full control of the White House and Congress, the Dems might be able to pass bigger. more robust economic relief and stimulus packages which should lift markets broadly.

Cannabis and Solar Stocks Would Surge Further

Also, expect marijuana and solar energy stocks to gain if Democrats win those two seats in Georgia. With Democratic control, Biden could get his solar-friendly policies passed, as well as decriminalizing marijuana on the federal level.

Since November, marijuana stocks have been rallying including Canadian-based Canopy Growth (Nasdaq: CGC). Cantor Fitzgerald analyst Pablo Zuanic raised his price on Canopy to 33 Canadian dollars ($25.89) from C$29 and said the stock would do even better with legalized marijuana on the U.S. national level.

“At present, Canopy Growth cannot directly invest in either company, so it has only been able to make loans to the respective CBD/hemp businesses of each company,” he said while keeping a “Neutral” rating on the stock.

Further “If Canopy indeed sees both companies as potential beachheads to develop its presence in U.S. THC, we wonder about future interim arrangements (pre-triggering events) to help both companies continue to grow organically and via M&A.”

In the marijuana space, I have recommended buying shares of Cronos Group (Nasdaq: CRON) ahead of the runoffs.

For solar stocks, I’ve been bullish on Canadian Solar (Nasdaq: CSIQ), which actually conducts a chunk of its business in China and Southeast Asia. Also, I've been bullish on Chinese-headquartered players including Daqo New Energy Corp. (NYSE: DQ) and ReneSola Ltd. (NYSE: SOL). Those stocks have been surging, for the most part, this year thanks to Beijing’s friendly incentives.

But on fears of tax hikes, the alarming amount of daily Covid-19 cases, and the new strain of coronavirus that has been found in the U.S., another big sell-off is bound to happen.

Topics:Cronos Group, Canopy Growth, Daqo New Energy, ReneSola, Canadian Solar.