5 Possible Impacts This Could Have on the Stock Market
Increased pressure from the Democratic party for President Joe Biden to pull out of the presidential race has led to an inevitable conclusion — Biden has withdrawn from the race today.
While Biden has endorsed Vice President Kamala Harris as the new nominee, Democrats still have the power to propose a different nominee.
How will this impact the economy, and more specifically, the stock market? Here’s a look at what experts had to say about it.
Also consider investing your money in these sectors if Trump wins.
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Immediate Reaction: Increased Volatility
Several experts argued that Biden’s exit will increase market volatility.
CEO of Impact Health USA Josh Thompson said, “[i]nvestors generally prefer stability and predictability and such a significant political shift would disrupt both.”
According to him, the initial response could be a sharp decline in stock prices as investors seek to hedge against potential risks.
Michael Collins, CFA, founder and CEO of WinCap Financial, echoed the sentiment, saying that there could be increased uncertainty and volatility in the market due to a change in leadership, as he feels a Biden withdrawal would almost guarantee a win for Trump.
“Investors may also react differently depending on who becomes the new frontrunner for the Democratic party and their perceived policies towards businesses and the economy,” he said.
“Could Be Supportive of U.S. Equities”
Now, in terms of specific sectors, some experts argued that an exit could help U.S. equities.
Timothy Holland, CFA and chief investment officer at Orion, said Biden’s “most likely replacement,” Kamala Harris, could be perceived to be a weaker candidate against Trump. However, he said “[it] could prove supportive of U.S. equities as Wall Street [begins] to contemplate and price in a fiscal policy backdrop that [features] both the extension of the Trump Tax Cuts and incremental government spending, particularly on the military.”
Holland also said such a combination could prove stimulating to the U.S. economy and corporate profits in the short to intermediate term, helping push stock prices higher.
“That said, accelerating economic growth could also push inflation higher longer-term, forcing the Fed to pivot from (the expected) rate cuts in 2024 to rate hikes in 2025 or 2026,” he said.
Stephanie Vaughan, co-founder of Veda, also said Biden dropping out of the race will likely have positive consequences for the U.S. equities market.
“Picking Kamala Harris would certainly create a situation in which Trump would be more likely to win. And Trump is clearly pro-growth and pro-innovation — both of which the American economy is sorely in need of now. Assets, therefore, would almost certainly benefit.”
Potentially Could Be Beneficial For Gold and Silver
According to Peter Earle, senior economist at the American Institute for Economic Research, most of any reaction that follows will be based upon the specific candidate.
And he said, there will be high uncertainty until that individual is nominated and accepts the nomination, which tends to be good for gold and silver.
“With uncertainty about who the candidate will be, investors will seek a safe haven until they can assess whether or not the replacement for Biden will continue or break from the high (and possibly higher) tax, more regulation, more government intervention policies of the Biden administration,” Earle said.
He also said until that can be determined, stores of value are likely to be sought out.
Thompson echoed the sentiment that the withdrawal of a sitting President from a reelection race is an unprecedented event that could lead to heightened fear and caution among investors.
“This could result in a more risk-averse market environment, with investors favoring safer, more stable investments over riskier stocks,” he said.
Impact on Bonds
According to Holland, while “it isn’t much to work off,” post-Presidential debate bond yields moved up and bond prices moved lower as Wall Street pondered the possibility of a Republican Election Day sweep and a likely extension of the Trump Tax Cuts and incremental government spending, particularly on the military.
“A dynamic that was seen as inflationary (as we know, some weaker than expected labor market and inflation data soon after pulled yields lower and pushed bond prices higher),” he said.
In turn, if President Biden’s most likely replacement is perceived to be a weaker candidate against President Trump, we could see a similar move in bond yields and bond prices, Holland said.
Impact on Crypto
Vaughan said there may be a rally in the crypto markets in the wake of Biden’s dropout.
“Most notably because a Trump presidency would be far more productive toward the crypto ecosystem as a whole,” she said.
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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