Investors brace for potential Biden withdrawal, economic impact

As speculation mounts over President Joe Biden’s reelection bid, investors are charting possible economic scenarios and strategic trades, bracing for the potential emergence of a stronger Democratic candidate.

This uncertainty follows Biden’s faltering performance during a televised debate against Republican contender Donald Trump, which has stirred anxiety in financial markets.

Bond yields have risen since the debate, reflecting investor apprehension about a possible Trump victory in the November 5th election. The anticipation of higher fiscal deficits and inflationary policies under a Trump administration has driven these changes. The political party that secures the White House will significantly influence trade, regulatory frameworks, and fiscal policies, sectors crucial to market stability.

Over the past week, U.S. stocks have seen an uptick, partially fueled by investor expectations of lower taxes and deregulation under a potential Republican administration. Despite Biden’s firm declaration of his intent to seek reelection in an ABC News interview on Friday, internal calls within the Democratic Party for him to reconsider his candidacy are growing louder. A planned Senate meeting on Monday aims to address these concerns, introducing further uncertainty that could disrupt economic forecasts and market stability.

“For the stock market or bond market, any candidate change introduces a layer of uncertainty,” said Michael Schulman, partner and chief investment officer at Running Point Capital Advisors. “Investors need to prepare strategies for scenarios where Biden is no longer the candidate.”

Vice President Kamala Harris stands as the most likely successor if Biden withdraws from the race, sources indicate. “Markets will need to rapidly assess what a new potential candidate supports,” particularly on critical issues like tariffs and the potential expiration of tax cuts, explained Michael Reynolds, vice president of investment strategy at Glenmede.

Some market analysts, however, believe that Harris would not significantly deviate from the current Biden-Harris economic policy. “I wouldn’t expect a substantial policy shift,” said Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth.

Research firm Capital Economics noted in a recent report that alternative candidates such as Harris or California Governor Gavin Newsom would likely maintain platforms closely aligned with Biden’s, avoiding major policy proposals.

Should Biden exit the race, the immediate aftermath could see a stock sell-off due to the ensuing uncertainty, especially given the high valuations currently seen in equities. “Nerves can be frayed in an expensive market,” observed John Lynch, chief investment officer for Comerica Wealth Management.

The appointment of a new Democratic nominee could also reverse the recent sell-off in Treasuries that followed the debate, particularly impacting long-term bonds. “If a new candidate emerges… the election could become more competitive, potentially leading to a divided government,” said Jack McIntyre, a fixed-income portfolio manager at Brandywine. A divided government, currently a reality with the House narrowly controlled by Republicans and the Senate by Democrats, is generally viewed favorably by investors as it minimizes the likelihood of sweeping policy changes.

Government bond prices could benefit from reduced chances of excessive fiscal stimulus under a divided government scenario, although these gains could be tempered by an economic slowdown, which might bolster the Republican campaign narrative in the coming months.

“It’s a bit early to make structural changes based on the election, but we’re entering a period where it becomes increasingly important for investment decisions and asset allocation,” McIntyre added.

Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, noted that a higher probability of a Trump victory could be contributing to the recent rise in the benchmark stock index. “Some investors may be buoyed by the prospect of a pro-business president,” Tuz said.

Historically, the S&P 500 has performed better under Democratic presidents, with an average annual return of 11.1% since 1945, compared to a 7.1% return under Republican administrations, according to Sam Stovall, chief investment strategist at CFRA.

A second Trump presidency might deliver lower corporate taxes, potentially boosting U.S. equity markets. However, it could also mean tougher trade relations, benefiting domestic manufacturers but posing risks for multinationals exposed to higher tariffs on Chinese goods.

Certain sectors could see divergent impacts based on the election outcome. Financials and small-cap companies might gain from reduced regulations under Trump, while solar and other clean energy companies would likely thrive under a Democratic administration.

“It’s very nuanced and uncertain,” Schulman concluded. “Even if election predictions are correct, market reactions can be unpredictable.”