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As a result of the disastrous television debate that took place the previous week, the re-election campaign of President Joe Biden appears to be hanging by a thread. As a result, investors may naturally worry whether a change at the top of the Democratic ticket would affect the stock market.
It is a good idea to examine how the market has conducted itself up to this point to get a decent idea of how it has responded to swings in the campaign between Biden and his Republican opponent, former President Donald Trump.
Adam Turnquist, chief technical strategist at LPL Financial, stated that "the market has been consistently trending in the same direction as Trump's odds" of victory in November. In March, when the market and Trump's prospects started moving in step, Turnquist was the first to point out a change in the link between the two, as per MarketWatch.
He added that this does not necessarily indicate that market players are delighted by Trump's measures. “I don’t think you can make the case that the market is moving higher because Trump’s odds are moving higher. But we know the market doesn’t like uncertainty,” Turnquist said.
Therefore, as Trump appeared more confident of his victory, the market took solace in the assurance that he would prevail. Turnquist observed that the market had demonstrated a good association with the president's prospects of being re-elected earlier in 2024 when Biden was the favorite to win the election.
In other words, the market appears to respond favorably to the predictions that either candidate will emerge victorious with a decisive victory. The disarray surrounding the Democratic ticket, on the other hand, may further increase the certainty that Trump will win the election or perhaps that Republicans will sweep the legislative seats.
In the aftermath of the debate on June 27, during which Biden delivered a sluggish performance and at times confusing, speculation over his potential candidacy has grown. Following that, Democratic legislators expressed their concerns regarding Biden's health and capacity to continue serving. According to statements made by Karine Jean-Pierre, the press secretary for the White House, to reporters on Wednesday, Biden was "absolutely not" resigning from the race.
This past Wednesday, Vice President Kamala Harris surged ahead of Vice President Joe Biden in specific betting markets regarding who will be the Democratic nominee for president. Meanwhile, as of Wednesday, the odds of victory for Trump were estimated to be 59% on PredictIt, while the odds of victory for Biden had dropped to approximately 16%.
Despite the fact that the race is still very tight, post-debate surveys have shown some leaning toward Trump. In a field of six contenders, a poll conducted by Suffolk University and USA Today and published Tuesday showed that Trump was leading Biden by three percentage points. This comes after the poll found that the candidates were tied one month ago.
Turnquist provided the following graphic, which illustrates the rolling three-month correlation between Trump's prospects, as predicted by PredictIt's prediction market, and the S&P 500 SPX, currently at 0.31.
It is true that this is not an especially high number: If the correlation between Trump's odds and the markets was 1.0, it would indicate that they were moving in tandem. On the other hand, if the correlation was—1.0, it would indicate that they were moving in complete opposition to one another.
On the other hand, the association has maintained a more extraordinary relationship than other components. As an illustration, the correlation between the movements of the 10-year Treasury yield BX: TMUBMUSD10Y, a rather significant macroeconomic element, and the S&P 500 index is approximately zero. This indicates that the two variables appear to have very little influence on each other at the present instance.
Last week, Jeff deGraaf, the founder of Renaissance Macro Research, made the observation that the negative correlation between Biden's standing in the polls, which is based on the RealClearPolitics polling average, and the performance of the S&P 500, even though it is 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 the performance of the stock market this year (see chart below).
The prospects of a Trump victory, which would potentially bring a complete extension of his tax-cut package from 2017 and more significant deregulation, have been argued by some investors and analysts to indicate that the market has indeed been positively affected by the possibility of a Trump victory.
In a note published on Monday, equities strategists at Morgan Stanley, led by Mike Wilson, stated that in the wake of the debate the previous week, customers were demonstrating an appetite for the kinds of small-capitalization and cyclical stocks that benefitted from Trump's victory in the 2016 election.
Nevertheless, they cautioned that investors must recognize significant contrasts between the present and the past.
“First, we think the data indicates that the cycle is more mature today, which supports a quality and large-cap bias. 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,” they wrote.
The potential for a broader extension of tax cuts and other measures was mentioned as a reason for a dramatic backup in Treasury yields following the discussion. This is true, although neither Biden nor Trump are expected to make significant efforts to reduce the deficits in the federal budget.
According to Turnquist, investors need to remember that election years typically experience more volatility as November draws closer when the election is taking place.
In addition, it is essential to keep a close eye on the stock market's performance in the three months before election day, November 5. According to Turnquist, the market's performance over the past century has accurately forecasted twenty-four out of twenty-four election outcomes. During this period, the incumbent tends to win when the market rises and to lose when the market falls.
Photo: Microsoft Bing
