Georgia Senate runoff: $600 billion more in stimulus money and higher taxes are on the line

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A large chunk of additional fiscal stimulus to help drive a COVID-19 economic recovery hinges on the outcome of the Georgia Senate election on Tuesday, Goldman Sachs argues.

But so does the potential for higher taxes to fund any further boost in government spending.

“If Democrats manage to win both of the Senate seats in play in Georgia, they would win 50 seats, which would allow Vice President-elect [Kamala] Harris to cast the tie-breaking vote. This would lead to greater fiscal stimulus—we would expect around $600 billion more on top of the recently enacted $900 billion—but would also likely mean tax increases to finance additional spending,” says Goldman Sachs Chief Economist Jan Hatzius.

Hatzius adds, “Regarding the latter, we would expect that an evenly divided Senate would approve only a fraction of the tax increases the Biden campaign proposed.”

The race Tuesday will see sitting Republican Senator Kelly Loeffler square off against Democratic challenger Reverend Raphael Warnock. Senator David Purdue — whose term just ended — is up against failed U.S. House of Representative candidate in Democrat Jon Ossoff. Early voting turnout has been strong most political observers argue, which has pushed the odds in favor of Democrats wrestling control of the Senate and pushing through a more progressive agenda.

To Hatzius’ point, such an agenda could include the higher taxes on corporations that then candidate Joe Biden pounded the table on during the presidential election.

Sen. Kelly Loeffler, R-Ga., speaks as President Donald Trump listens during a campaign rally in support of Senate candidates Sen. Kelly Loeffler, R-Ga., and David Perdue in Dalton, Ga., Monday, Jan. 4, 2021. (AP Photo/Brynn Anderson)
Sen. Kelly Loeffler, R-Ga., speaks as President Donald Trump listens during a campaign rally in support of Senate candidates Sen. Kelly Loeffler, R-Ga., and David Perdue in Dalton, Ga., Monday, Jan. 4, 2021. (AP Photo/Brynn Anderson)

Without question, that shift in the perceived Georgia election outcome did its part to create a challenging first day of trading in the New Year. All three major stock indexes shed more than 1.2% on Monday. It was risk-off in most areas of the market that were hot in 2020, including surging buzzy startups such as QuantumScape and Airbnb.

“Should the Democrats win both seats, we expect the S&P 500 to become vulnerable to a downdraft in the neighborhood of 6% to 10%,” wrote Oppenheimer strategist John Stoltzfus in a note to clients.

But some in the political sphere contend a Democratic win in Georgia won’t mean the end of the world for 2020’s stampeding herd of market bulls.

“The incoming administration is going to focus on one thing: vaccines,” Stifel’s Washington policy chief Brian Gardner told Yahoo Finance Live. “So the first six months of the year, the only thing that matters is getting the vaccine out and getting it out effectively and widely.”

Hey, it takes two to make a market. And perhaps a lot more than one Senate election to derail the well-entrenched bull thesis on equities.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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