After last week’s disastrous TV debate, President Joe Biden’s campaign for re-election looks like it’s hanging by a thread. Investors may be wondering if a change at the top of the Democratic ticket would affect the stock market.
Start by looking at how the market has responded to changes in the race between Biden and Trump, the Republican candidate who is running against him.
Mr. Adam Turnquist, chief technical strategist at LPL Financial, said over the phone that the market has been moving in the same direction as President Trump’s chances of winning in November. When the market and Trump’s chances started to move in sync with each other in March, Turnquist first pointed out that the relationship was changing.
He warned that doesn’t mean people in the market are necessarily in favour of Trump’s policies.
Turquist said, “I don’t think you can make the case that the market is going up because Trump’s chances are going up.” “But we know that the market doesn’t like being uncertain.”
As it has looked like Trump is more likely to win, the market has felt better about that. Turnquist pointed out that the market had been in line with the president’s chances of being re-elected earlier in 2024, when Biden was the favourite to win.
To put it another way, the market seems to be responding well to the idea that either candidate will easily win. While this is going on, chaos on the Democratic ticket could make it even more likely that Trump will win or that the Republicans will sweep Congress.
Since the June 27 debate, where Biden gave a stuttering and sometimes confusing performance, there has been more talk about his possible candidature. Since then, Democratic politicians have spoken out about their worries about Biden’s health and ability to run for office. Karine Jean-Pierre, the press secretary for the White House, told reporters on Wednesday that Biden was “absolutely not” dropping out of the race.
Some oddsmakers now think that Vice President Kamala Harris, not Vice President Joe Biden, will be the Democratic nominee for president. This happened on Wednesday. Also, as of Wednesday, PredictIt gave Trump 59% of the votes, while Biden’s dropped to about 16%.
Some people have changed their minds about Trump since the debate, but the race is still very close. A Suffolk University/USA Today poll released on Tuesday showed Trump ahead of Biden by three percentage points in a field of six candidates. A month ago, the poll showed the candidates tied.
This is the chart that Turnquist showed. It shows that the rolling three-month correlation between Trump’s chances, based on PredictIt’s prediction market, and the S&P 500 SPX is now 0.31.
That isn’t a very high number, though: If the correlation between Trump’s odds and the markets was 1.0, they would be moving in sync. If the correlation was -1.0, they would be moving in the exact opposite direction.
But the correlation has been stronger than other things. For example, there is almost no relationship between changes in the 10-year Treasury yield BX:TMUBMUSD10Y and the S&P 500 index. This means that they don’t seem to have much of an effect on each other right now.
Last week, Jeff deGraaf, founder of Renaissance Macro Research, said that the weak negative link between Biden’s poll numbers and the S&P 500’s performance is the best way to explain this year’s stock market performance (see chart below). This link is not statistically significant, but it is better than any other factor, such as oil prices, Treasury yields, Federal Reserve policy, corporate bond spreads, purchasing managers’ index readings, inflation data, and gross domestic product.
Some investors and strategists have argued that the prospects of a Trump victory — which would potentially bring a full extension of his 2017 tax-cut package as well as further deregulation — have indeed been market positives.
In a Monday note, equity strategists at Morgan Stanley led by Mike Wilson said that in the wake of last week’s debate, clients were showing appetite for the types of small-capitalization and cyclical stocks that benefited following Trump’s 2016 election victory.
But investors should be aware of important differences between now and then, they warned.
“First, we think the data indicates that the cycle is more mature today, which supports a quality and large-cap bias,” they wrote. “Further, the market welcomed a reflationary/pro-fiscal playbook in 2016 as the economy was recovering from the manufacturing/commodity downturn of 2015, and inflation was broadly not a headwind for consumers.”
Indeed, while neither Biden nor Trump are expected to do much to rein in fiscal deficits, prospects for a broader extension of tax cuts and other measures were cited as a reason for a sharp backup in Treasury yields following the debate.
An important thing for investors to keep in mind is that election years tend to see increased volatility as November approaches, Turnquist said.
The other important thing to watch is how the stock market performs in the three months leading up to Election Day on Nov. 5. In the last 100 years, the market’s performance in that stretch has predicted 20 of 24 election outcomes, Turnquist noted — with the incumbent tending to win when the market rose, and losing when it fell.
