Why Bulls Are So Afraid of a “Blue Wave”

Stocks are plunging today after opening near their record highs. The Dow (-1.40%), in particular, is getting hammered. All three major indexes are down big as of noon.

But headlines aren’t solely responsible for the market’s morning drop. Nor is a significant Covid-related setback.

Instead, equities are falling because traders fear what’s coming:

The Georgia runoffs and a fresh batch of holiday coronavirus data.

New daily Covid infections are down over the last few weeks. There were 210,000 new cases yesterday, pulling down the U.S. 7-day average to 214,000. That’s below the Thanksgiving high.

It’s likely due to a reduction in testing, though, and not a decrease in actual cases. Increased travel, virus transmission, and testing should push the 7-day average to a new high in the coming weeks.

That’s going to weigh heavily on bulls, especially since vaccine rollouts are happening much slower than expected. Drug companies thought they’d have 20 million shots administered as of yesterday. Instead, only 4 million Americans have been vaccinated thus far.

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The current rate is roughly 500,000 vaccinations per day, up from 200,000 in December. That should increase as we move through January.

But the ramped-up vaccination efforts are unlikely to flatten the 7-day new infection curve any time soon.

More imminently dangerous to stocks, however, are the aforementioned runoff elections in Georgia.

“With the Georgia runoff elections on Tuesday and the electoral college drama on Wednesday, expect two-way trading this week and a pickup in short term volatility,” warned Marc Chaikin, CEO of Chaikin Analytics.

In particular, a surge in “Blue Wave” betting odds over the last few days has bulls worried. A Democrat-controlled Congress, as a result of a big win in Georgia, would make obstructionist tactics impossible for Republicans.

A larger stimulus package would likely follow, too, along with a controversial Biden tax plan and more aggressive fiscal policy. The latter of which could lead to higher interest rates – something the market simply has no stomach for.

The last significant rate hike occurred in late 2018 when the Fed attempted to induce quantitative tightening (QT). Stocks plummeted quickly thereafter.

Today’s kneejerk reaction from investors is more understandable now that the perma-low-rate environment seems to be at risk.

“[A Blue Wave] is an outcome for which investors aren’t positioned, so it could cause a market mess,” said Bloomberg’s John Authers.

Wall Street strategists see a short-term correction coming as well. Morgan Stanley’s Michael Wilson explained in a morning note to clients that “the ‘risk-reward’ of the US equity market has deteriorated materially and the market is ripe for a drawdown.”

Wilson specifically pointed to the Georgia runoffs as a potential downside trigger.

With so much fear and uncertainty at play, traders could have a hard time finding safe havens in the event of a broader sell-off. It’s no surprise to see inflation hedges erupting in response.

And that’s especially true now that the idea of “helicopter money,” or cash distributed from the Fed directly to consumers, could soon become a reality. If the government goes “whole hog” on supporting the U.S. economy in 2021, the dollar will continue to slump.

Meanwhile, cash alternatives, like gold and Bitcoin, could easily keep rising.

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