Wall Street is watching the Alabama Senate race along with the rest of the U.S., wondering how it could affect tax cuts and the Republican agenda.
The close race pits Republican Roy Moore against Democrat Doug Jones. Polls have mostly shown a slim lead for Moore, but it's unclear how much support he will get from some groups within the Republican Party that may be unwilling to overlook allegations against Moore of sexual misconduct with teenagers.
While President Donald Trump and the Republican National Committee have urged Alabamans to vote for the GOP candidate, some Republicans have spoken against Moore, including former Secretary of State Condoleezza Rice and Alabama Sen. Richard Shelby, who said he would not vote for him.
"A win by Jones would shrink the GOP Senate margin to 49-51, making it virtually impossible for [Senate Majority leader] Mitch McConnell to get much done next year," writes Greg Valliere, chief global strategist at Horizon Investments. "Why? Because GOP mavericks Susan Collins, Bob Corker and others are likely to stray, knowing that their votes will be even more important with a reduced Republican majority."
Stock prices have gotten a boost from just the idea of tax reform, mostly in the past month as both the House and Senate approved versions of the bill that are now being worked out in conference.
"I think that most investors are probably hoping that the outcome will not adversely impact the tax vote," said Sam Stovall, chief market strategist at CFTA. "I think Wall Street is hoping the tax bill passes and believes there's a greater likelihood if that Senate seat stays Republican."
Stovall said if Moore loses, it could pressure stocks. "Without the tax cut, I think stocks are overvalued by 10 to 15 percent," he said. Tax legislation is expected to be ready for a vote before Congress breaks for the holidays — too soon for the new Alabama senator to vote.
Republicans expect to bring the tax plan to a vote on Dec. 22 (before the next senator would be seated), "though we've seen such dates slip in the past," wrote Ian Lyngen, head of U.S. rates strategy at BMO. "Rather than broader and more grandiose conclusions about the shape of the 2018 midterms, markets may have to simply settle on what this race means for legislation in the coming months."
The polls will close in Alabama at 8 p.m. ET.
A loss by Moore could also be a message from voters in a pro-Trump state that Republicans may face a difficult time in the 2018 midterms.
"Donald Trump's base seems to be a little less firm now, and if it's wavering even in Alabama, there are implications nationwide," notes Valliere. "If Moore loses, GOP leaders will blame the disastrous influence of Steve Bannon, and they will worry that the sexual harassment issue is a raging fire that threatens to engulf even Trump."
Brown Brothers Harriman chief currency strategist Marc Chandler said he does not expect a big market impact if Jones wins. He also said it may not matter if the Republicans lose one of the houses of Congress next year.
"I don't think it really changes anything," he said. "The big problem is not between Republicans and Democrats, it's between Republicans."