Tuesday, January 5, 2021

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2021 gets underway looking a lot like 2020.

Overheated momentum stocks and rising political risks ruled the day in markets on the first trading day of 2021.

New year, same issues.

When the dust settled on Monday, all three major averages lost more than 1.2% with the S&P 500 and the Nasdaq both dropping more than 1.4%. Monday marks the worst opening session of the year for each of the Dow, S&P 500, Nasdaq, and Russell 2000 since 2016. At one point during Monday’s session, all three majors were off more than 2%.

Monday also goes down as one of the S&P 500’s 10 worst first trading days to a year on record. All three indexes finished the final trading session of 2020 at record highs.

Bespoke Investment Group pointed out in a note published Monday afternoon that the stocks under the most pressure were those that had gone up the most in the second half of 2020. “Taking profits” is a cliché but also perhaps not an entirely inaccurate version of events in Monday’s market.

This also isn’t the first time we’ve seen one-day sell-offs over the last several months centered around recent winners becoming quick losers. Given the broad gains so many stocks and sectors have enjoyed over the last nine months, it wouldn’t be surprising to see more days like this.

And then, of course, there’s the Georgia problem.

Later today, Georgia residents will head to the polls to settle the race for both of the state’s Senate seats. And after investor consensus had seen these races likely resulting in a split for Democrats and Republicans — a result that would preserve the GOP advantage in the Senate — recent polls have cast some doubt on this view and actually suggest both Democratic candidates hold a slight edge.

If Democrats take both seats, then a 50-50 split would result in the Senate, giving Democrats an effective majority with Vice President-elect Kamala Harris able to a cast a vote to break any ties.

In a note to clients published Monday morning, John Stoltzfus, chief investment strategist at Oppenheimer, said a Democratic sweep in Georgia would make the S&P 500 “vulnerable to a downdraft in the neighborhood of 6% to 10%.”

“Increased uncertainty over taxes and spending could likely weigh on the equity market at least until the intentions of the Biden administration are given greater definition as to what a new tax regime might look like and how much any expansion of the government and its services would cost,” Stoltzfus said.