Wall Street experts are calling Georgia's runoff results 'the first surprise of 2021.' Here's how 4 of them recommend positioning your portfolio for what could happen next.
Summary List PlacementDemocrats Raphael Warnock and Jon Ossoff took victory in Georgia's Senate runoff elections Tuesday, giving their party control of the upper chamber of Congress and sealing the so-called blue wave. Markets had apparently been pricing in a divided government, sending some investors — especially those in megacap growth stocks — scrambling to reposition themselves early Wednesday morning. But by midday, all three major stock-market indexes were positive, perhaps a surprise considering concerns from some on Wall Street that there would be short-term downward pressure in the market if Democrats won both races. Morgan Stanley had called the election outcome a hurdle for markets, and Oppenheimer had predicted a 6 to 10% sell-off if such a scenario unfolded. Now that results are known, and a further-left government agenda can reasonably be expected compared with a divided Congress, what are the implications for financial markets? We compiled commentary from four Wall Street experts on where investors should now be looking for gains with a Democratic-controlled government. Michael Zezas, head of US public-policy research and municipal credit strategy at Morgan Stanley In a Wednesday note, Morgan Stanley strategists including Michael Zezas called the Senate flip the "first surprise of 2021" because investors had priced in another outcome. He said this election result "further supports" higher rates and a weaker US dollar in 2021; additional fiscal stimulus could reduce the appeal of the dollar as a safe haven and lift inflation expectations. This will boost cyclical stocks, Zezas said, referencing research from his Morgan Stanley colleague Mike Wilson. Copper will also benefit more than gold from fiscal stimulus and higher rates, Zezas said. Finally, Zezas said tax hikes and regulation changes would be hard to implement with such a narrow lead for Democrats in the Senate. "The policy difference between the most liberal and conservative Senate Democrat is large; to pass, legislation needs to satisfy both," he said. "As such, we expect a focus on items that can satisfy both wings." Neil Dutta, head of US economics at Renaissance Macro Research Neil Dutta said in a note Wednesday that investors should look toward banks now that Democrats would control the Senate. "2021 GDP estimates, currently at just four percent, will continue to rise; the right tail is likely to come up as additional fiscal relief comes into play," Dutta said. "The Fed will resist changing its current policy guidance and will accommodate the improvement in the economy — passive easing. This should lift inflation expectations, help steepen the yield curve, and provide a tailwind to US banks." Second, Dutta said a weakening of the US dollar — and therefore a better exchange rate for foreign firms and governments — would lead to better performance from emerging-market equities relative to the US market. Lastly, he said the more robust economic recovery likely to occur under Democratic leadership because of more fiscal stimulus would be good for energy and industrial commodities. Brian Walsh, senior financial advisor at Walsh & Nicholson Financial Group Brian Walsh said in a November 6 interview with Business Insider that investors might begin rotating out of growth stocks and into more cyclical stocks, which would benefit from heftier fiscal stimulus if Democrats flipped the Senate. More specifically, he said to keep an eye on utilities. "Utilities right now are kind of a value play," Walsh said. "If we have a blue wave, growth will be put on hold. I think we're going to see that materialize into further gains in the utilities sector." Other areas Walsh likes with a Democratic sweep are industrials and materials, with the high likelihood of an infrastructure plan being passed by Democrats. "I think industrials and materials would be a pretty good play given the fact that the Biden campaign does want to have a massive infrastructure movement," he said. "If we do get this flipped Senate, you're going to see some of those policies come to fruition." Finally, Walsh said stocks placing an emphasis on environmental, social, and governance standards, or ESG, could benefit. "You might see a big influx into ESG as more regulation comes into play and climate-change policies are put on the table by the Democrats," he said. David Bahnsen, chief investment officer of The Bahnsen Group On the other hand, David Bahnsen said in a Wednesday statement that investors should be taking little action after learning the results of the runoffs. "Investors should not be making any portfolio reallocations based off of the Georgia Senate results," Bahnsen said. "If an investor's asset allocation was to be substantially altered by a 50-50 Senate versus a 51-49 Senate split, that asset allocation was never constructed well from the outset." He added: "The Democrats' small lead in both the Senate and the House will make it tougher than many believe to pass tax hikes, impose regulation, and enact some of the other market unfriendly policies that investors have been worried about under a blue-wave scenario." But he did say a rotation into value stocks would be "reinforced" by the results with the increased likelihood of a bigger stimulus package from Congress and a steeper yield curve, boosting banks and companies outside the tech sector. Bahnsen also said the results had no bearing on US-China relations. "That was never a senatorial story to begin with — not during Trump and not after Trump," he said. "The outlook on US-China relations remains a market unknown because we really do not know what posture the Biden administration is going to take." SEE ALSO: A crypto CEO breaks down why he would not be surprised to see bitcoin and ethereum rise at least 100% in 2021 — and says the current sell-offs are a 'very natural and healthy thing' Join the conversation about this story » NOW WATCH: Here's what it's like to travel during the coronavirus outbreak
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