Key Takeaways
- The decision by Joe Biden to leave the presidential race added a new wrinkle to the outlook for financial markets.
- Some analysts point to the potential breakdown of the “Trump Trade,” which refers to bets on stocks that would benefit from the former President prevailing in November.
- Others say that the equities market is more candidate-agnostic than many believe.
The decision by President Joe Biden to drop his re-election bid and throw his support behind Vice President Kamala Harris added a new, if not completely unexpected, wrinkle to the outlook for financial markets.
Most of the Democratic party quickly rallied around Harris, although her nomination is by no means guaranteed. Polls show Harris slightly outperforming Biden in a head-to-head with Trump, though the reliability of these polls is highly uncertain given how quickly the landscape has changed in recent days.
Analysts were mixed about the impact Biden’s decision would have on both the election and the market.
“The prediction market-implied odds of Democrats winning the White House rose a few points but remains slightly less than 40%,” wrote Goldman Sachs analysts in a note Monday. The odds of a “Republican sweep” decreased slightly on Sunday’s news, they noted, “but this remains the most likely outcome by a significant margin.”
Break Down of the ‘Trump Trade’?
Some analysts saw the potential for a breakdown of the “Trump Trade,” which refers to bets on stocks that would benefit from the former President prevailing in November and following through on his promises to curtail government regulation and extend his 2017 tax cuts, some of which are set to expire in 2025.
“The tightening of the race should see some unwind of the recent ‘Republican sweep’ enthusiasm that helped stocks rally in early/mid July,” wrote analysts at Kinsale Trading.
The Risk of a Tighter Race
Analysts at Deutsche Bank, meanwhile, argue the market is more candidate-agnostic than many believe. A tighter race, they argue, raises uncertainty, creating headwinds for equities. Signs that one party is running away with the election, on the other hand, reduce risk.
“In our reading,” they wrote in a note on Friday as implied odds of a Trump victory slipped amid speculation Biden would withdraw from the race, “the market selloff over the last 2 days partly reflects the modest re-tightening in the Presidential race.”
Major stock indexes fell sharply on Thursday and Friday, led by a selloff in technology stocks. A recovery in tech stocks led the broader market higher on Monday.