What Biden’s Departure Could Mean for Stock Market Stability

With President Joe Biden’s re-election campaign appearing to hang by a thread after last week’s debate debacle, investors understandably may wonder whether a change at the top of the Democratic ticket would move the stock market.

To understand this, it’s useful to examine how the market has reacted to swings in the race between Biden and his Republican challenger, former President Donald Trump.

“The market has been consistently trending in the same direction as President Trump’s odds of victory in November,” said Adam Turnquist, chief technical strategist at LPL Financial, in a phone interview. Turnquist first noted a change in this relationship in March, when the market and Trump’s prospects began to move in tandem.

However, Turnquist cautioned that this doesn’t mean market participants are necessarily endorsing Trump’s policies.

“I don’t think you can make the case that the market is moving higher because Trump’s odds are moving higher,” Turnquist said. “But we know the market doesn’t like uncertainty.”

As Trump’s chances of winning have seemed more assured, the market has taken comfort in that certainty. Turnquist noted that earlier in 2024, when Biden was favored to win, the market had also shown a positive correlation with the president’s re-election chances.

In essence, the market seems to react positively to the prospects of a decisive victory by either candidate. Uncertainty around the Democratic ticket, meanwhile, could further boost certainty around a Trump victory or even a Republican congressional sweep.

Speculation about Biden’s candidacy has intensified since the June 27 debate, where his performance was widely criticized. Democratic politicians have expressed concerns about Biden’s condition and viability. White House Press Secretary Karine Jean-Pierre stated Wednesday that Biden was “absolutely not” withdrawing from the race.

Vice President Kamala Harris on Wednesday moved ahead of Biden in some betting markets regarding who will be the Democratic presidential nominee. Meanwhile, Trump’s odds of victory were pegged at 59% on PredictIt as of Wednesday, while Biden’s fell to around 16%.

Post-debate polls have shown some shift towards Trump, though the race remains close. A Suffolk University/USA Today poll published Tuesday showed Trump ahead of Biden by 3 percentage points in a six-candidate field, after previously finding the candidates tied a month ago.

Turnquist shared a chart showing the rolling three-month correlation between Trump’s prospects, based on PredictIt’s prediction market, and the S&P 500, now standing at 0.31.

While not particularly high (a correlation of 1.0 would mean they move in lockstep, while -1.0 would mean they move perfectly in opposite directions), the correlation is stronger than other factors. For instance, the correlation between moves in the 10-year Treasury yield and the S&P 500 index is roughly zero, indicating little current influence on each other.

Jeff deGraaf, founder of Renaissance Macro Research, recently noted that the negative correlation between Biden’s standing in the polls, based on the RealClearPolitics polling average, and the S&P 500’s performance, while not statistically significant, explains stock-market performance this year better than other factors like oil prices, Treasury yields, Federal Reserve policy, corporate bond spreads, purchasing managers’ index readings, inflation data, and gross domestic product.

Some investors and strategists argue that prospects of a Trump victory — which could bring a full extension of his 2017 tax-cut package and further deregulation — have been market positives.

In a Monday note, equity strategists at Morgan Stanley led by Mike Wilson said that after last week’s debate, clients were showing interest in small-capitalization and cyclical stocks that benefited following Trump’s 2016 election victory.

However, they warned investors to note important differences between now and then.

“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.”

While neither Biden nor Trump are expected to significantly rein in fiscal deficits, prospects for a broader extension of tax cuts and other measures were cited as reasons for a sharp rise 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.

Another key point to watch is how the stock market performs in the three months leading up to Election Day on Nov. 5. Over the last 100 years, the market’s performance during that period has predicted 20 of 24 election outcomes, Turnquist noted — with the incumbent tending to win when the market rose, and losing when it fell.