How the Stock Market Will React if Biden Exits the Race

The S&P 500 and Trump’s victory odds are increasingly correlated as investors seek ‘certainty’: LPL’s Turnquist

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

A good place to start is to look at how the market has reacted so far to swings in the race between Biden and his Republican challenger, former President Donald Trump.

stock market

“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 flagged a change in the relationship in March, when the market and Trump’s prospects began to move in step with each other.

That doesn’t mean market participants are necessarily cheering Trump’s policies, he cautioned.

“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.”

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

In other words, the market seems to be reacting positively to prospects of a clear-cut victory by either candidate. Disarray around the Democratic ticket, meanwhile, could further enhance certainty around a Trump victory or even a Republican congressional sweep.

Speculation around Biden’s candidacy has intensified since the June 27 debate that saw him deliver a halting and at times incoherent performance. Democratic politicians have subsequently aired concerns about Biden’s condition and viability. White House Press Secretary Karine Jean-Pierre told reporters Wednesday that Biden was “absolutely not” withdrawing from the race.

Vice President Kamala Harris on Wednesday moved ahead of Biden in some betting markets when it comes to 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 plunged to around 16%.

Post-debate polls so far have shown some shift to 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 finding the candidates tied a month ago.

Turnquist offered the chart below, which shows the rolling three-month correlation between Trump’s prospects, as based on PredictIt’s prediction market, and the S&P 500 SPX now stands at 0.31.

Granted, that isn’t particularly high: A correlation of 1.0 would mean that Trump’s odds and the markets were moving in lockstep, while a negative correlation of minus 1.0 would mean they’re moving perfectly in opposite directions.

But the correlation has been running stronger than other factors. The correlation, for example, between moves in the 10-year Treasury yield BX, a rather important macroeconomic factor, and the S&P 500 index is roughly zero — which means they appear to presently have little influence on each other.

Jeff deGraaf, founder of Renaissance Macro Research, last week noted that the negative correlation between Biden’s standing in the polls, based on the RealClearPolitics polling average, and S&P 500’s performance, while not statistically significant, does a better job than any other factor — including oil prices, Treasury yields, Federal Reserve policy, corporate bond spreads, purchasing managers’ index readings, inflation data and gross domestic product — of explaining stock-market performance this year (see chart below).

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.

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