President Biden’s announcement that he is withdrawing from the race for the White House and endorsing Vice President Kamala Harris as the Democratic nominee has investors and economists reassessing the campaign’s impact on everything from the stock market to the economy. the so-called “Trump trade.”
So far, U.S. markets have been calm about Biden’s announcement that he’s quitting the campaign. The tech-heavy S&P 500 and Nasdaq both rose Monday, partly because Wall Street had already priced in the likelihood of Biden’s departure. But in the short term, investors are warning of increased volatility in U.S. markets, especially if the race tightens with a new Democratic candidate.
Before Biden’s decision on Sunday, former President Trump had taken the lead in the polls, ensuring his biggest national lead over Biden That tailwind helped spark the Trump trade, which describes a strategy of investing in assets and stocks that investors believe would benefit from a Republican White House, ranging from cryptocurrencies to energy stocks.
But Wall Street is now studying the new landscape and examining the economic policies and views of Harris, who has won the support of leading Democrats to replace Biden at the top of the ticket. A new Democratic presidential nominee could ultimately result in a tighter race than expected before Biden’s decision, which could trigger more volatility in U.S. markets as investors try to gauge which party — and its economic policies — will prevail in November, investors said.
“U.S. politics will be far more unpredictable for at least the next three months than investors had anticipated – and this heightened uncertainty will necessarily be bearish for most assets, particularly those that are perfectly priced, with valuations that assume predictability in a world where we should expect the unexpected,” Anatole Kaletsky, co-founder and chief economist at investment advisory firm Gavekal, said in a research note.
Impact on stock markets
In other words, some investors are warning that the S&P 500, which has jumped 22% over the past 12 months, could face downward pressure from the new unpredictability of the presidential race.
“Biden’s departure represents a whole new level of political uncertainty. It could be the catalyst for long-overdue market volatility,” Gina Bolvin, president of Bolvin Wealth Management Group, noted in an email.
Still, Wall Street’s shrug Monday morning underscores that investors are generally relying on key economic data — such as inflation reports and corporate earnings — to decide where and when to invest, rather than political elections. The U.S. economy is expected to remain strong in 2024 by many measures, with Goldman Sachs forecasting GDP growth of 2.5% in the second half of 2024 on Sunday, which would put the U.S. on pace to match 2023 growth.
The Fed is also widely expected to begin cutting interest rates at its September meeting, a move that could help ease borrowing costs for home buyers and businesses, potentially also boosting investment and spending.
“[I]“Investors should keep in mind that U.S. policy outcomes are far from being the primary driver of financial market returns, or even sector performance,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, said in an email. “Economic data and expectations for Federal Reserve rate cuts remain at least as important.”
Trade with Trump
To be sure, many institutional investors continue to give Trump a leg up, whether he runs against Harris or another Democratic opponent. Trump’s odds of winning the election have fallen slightly, while Harris’s odds have increased by 11 percentage points, though she still trails Trump, according to prediction market Polymarket.
The new odds have distracted investors from speculation about Trump, which appears to be fading after Biden’s decision. For example, with Trump seen as pro-cryptocurrency, bitcoin has surged more than 50% this year so far. But on Monday, bitcoin’s price fell 1.5%, while other cryptocurrencies also lost ground.
In recent weeks, “we have seen some rotation toward the ‘red’ sectors at the expense of the ‘blue’ sectors… as recent momentum has favored the Republican Party,” noted UBS’s Marcelli. “This could at least partially reverse in the coming days as markets analyze the latest developments.”
What are Harris’s economic views?
Meanwhile, Wall Street is also focusing on Harris’ economic views, assessing what her candidacy and a possible White House victory could mean for the U.S. economy and markets. She is likely to continue Biden’s policies, including his focus on combating climate change and scrutinizing anticompetitive practices by large companies, economists said.
Another Democratic administration “would likely continue to support initiatives for green energy, energy efficiency and electric vehicle manufacturers,” Marcelli noted.
One of the main areas where Biden and Harris differ is trade policy, according to BTIG’s Isaac Boltansky in a research report released Monday.
“In fact, following our review of policy proposals and numerous contact conversations, the only area of slight divergence we could find was on trade policy,” Boltansky wrote.
Harris, for example, voted against the United States-Mexico-Canada Agreement (USMCA) when she was a senator. That 2020 trade deal, signed by former President Donald Trump, replaced the North American Free Trade Agreement (NAFTA), which Harris opposed over climate concerns. She also opposed the Trans-Pacific Partnership, or TPP, a 2016 trade deal, over similar concerns.
That might suggest Harris might prioritize environmental and climate concerns over trade deals, for example. But “that’s what matters most because there’s little to no policy difference between Biden and Harris,” Boltansky noted.
