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Markets Expect GOP to Hold Senate in Georgia Runoff. Here’s What Happens if They Don’t.

Voters line up for the first day of early voting outside the High Museum polling station on Dec.14, 2020 in Atlanta, Georgia. Georgians are headed to the polls to vote in a run off election for two U.S. Senate seats.

Jessica McGowan/Getty Images

The markets are expecting at least one Republican to hold on to the two U.S. Senate seats that are up for grabs in Georgia in a nail-biter of a runoff election on Tuesday.

If the GOP falls short, look out below. Already on Monday, markets tumbled 2%, as jitters over the outcome in Georgia outweighed optimism that the coronavirus was going to quickly become an issue of the past.

Stocks soared to record highs at the end of last year on expectations that an incoming administration led by President-elect Joe Biden would push for more economic stimulus. But those expectations included the GOP retaining narrow control of the Senate and the Democrats holding the House.

Right now the GOP’s Senate margin is 50-48, and the candidates Kelly Loeffler and David Perdue are running practically even with their Democrat challengers in Georgia.

Overall, markets would react negatively in the short-term if the Democrat candidates Jon Ossoff and Rev. Raphael Warnock both prevailed and knocked the Republicans out of the majority, according to analysts at JPMorgan. Vice President-elect Kamala Harris would be the Senate tiebreaker in that event.

“The potential wild card is the Georgia runoff, where polls have throughout pointed to Republicans keeping the control of the Senate,” the bank’s equity strategy analysts wrote in a note on Monday.

Any surprise, they added, and investors’ knee-jerk reaction would be a falling dollar and a bounce in bond yields. “This might weigh on the overall market in the very short term,” they said.

But they also pointed to a potential silver lining: “It could also catalyze the next leg up in Value rotation.”

The JPMorgan analysts upgraded the value versus growth trade before the general election in November, noting that value stocks have lagged behind growth for a long time, and fell the most behind ever last year.

“We continue to believe that the rotation will have legs, and importantly that it will likely happen against the backdrop of rising markets,” they said in Monday’s note.

JPMorgan recommends buying banks, a beaten down group that has proven to have resilient balance sheets and will start paying dividends this year. The analysts also said buy insurance, materials, miners and construction material stocks.

They recommend a neutral stance on technology, the sector that has driven the huge rally in the Dow Jones Industrial Index and S&P 500. “The relative outperformance could start waning as cyclical tailwinds for Tech are turning,” they said.

In a note Monday, S&P Global Market Intelligence said just three stocks— Apple (AAPL), Amazon.com (AMZN), and Microsoft (MSFT)— accounted for more than 53% of the S&P’s total return last year.

The Georgia runoff also has implications for stocks in the energy sector, according to analysts at Baird, especially in renewable energy.

Even if Republicans retain control of the Senate, the conditions are favorable for policy to move ahead on renewable fuels and electric vehicles. The recently passed spending bill provided clean energy funding and extended tax credits.

But if Democrats take both seats, “we believe renewable stocks would move significantly higher in anticipation of more aggressive policies on emissions,” the Baird analysts wrote in a note.

In the latter scenario, Biden’s $2 trillion climate change and economic stimulus plan would have an easier time moving forward, they also said.

The analysts named First Solar (FSLR), with a $125 price target, and Sunnova Energy International (NOVA), with a $36 price target, as their favorite picks.

Shares of First Solar rose 2.6% on Monday, while shares of Sunnova rose 0.3%. The S&P 500 fell 1.5%.

Write to Liz Moyer at [email protected]

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