The financial markets are set to open with high volatility following President Joe Biden's unexpected announcement that he will not seek re-election in 2024. This decision has injected significant uncertainty into the economic landscape, as Democrats rush to rally behind a new candidate. Biden has endorsed Vice President Kamala Harris as his preferred successor, adding another layer of complexity to the already tumultuous political scene.
Investors are bracing for a turbulent period ahead. "If President Biden were to announce his withdrawal from the reelection race, the immediate market reaction would likely be one of volatility and uncertainty," Josh Thompson, CEO of Impact Health USA, told Yahoo Finance over the weekend. He emphasized that markets generally prefer stability and predictability, both of which are disrupted by such a significant political shift.
This uncertainty is expected to push investors towards safe-haven assets such as gold, silver, and the Swiss franc. Additionally, the so-called "Trump Trade" might stall. This term refers to market behaviors influenced by the prospect of a second Trump administration, which has been gaining traction since Trump outperformed Biden in a recent debate and survived an assassination attempt.
"Should Biden leave the race, we would not immediately change our electoral odds," noted Raymond James Washington policy analyst Ed Mills in a note shared with CNBC. "We could see a stalling out of the recent 'Trump Trade' as the market reassesses the race, but we do not see a broader market reaction."
The Trump Trade, characterized by investor expectations of business-friendly policies under Trump, has significantly impacted sectors such as healthcare, banking, cryptocurrency, and oil. Tesla and Trump Media and Technology Group are also seen as potential beneficiaries of a Trump presidency.
Biden's decision has added layers of complexity to market dynamics. Cameron Dawson, CIO of NewEdge Wealth in New York, mentioned, "It does take some of the wind out of the sails of the Trump Trade," while indicating that markets await more clarity on who will be the Democratic nominee.
With Biden stepping down, the race is open for a new Democratic leader. Vice President Kamala Harris, who has Biden's endorsement, quickly moved to consolidate support. "I am honored to have the President's endorsement and my intention is to earn and win this nomination," Harris stated. She spent Sunday afternoon calling Democratic officials and delegates to secure her position, receiving immediate endorsements from prominent figures such as Congressional Hispanic Caucus chairwoman Nanette Barragán and Rep. Annie Kuster of the New Democrat Coalition.
However, the market response to this political shakeup is expected to be significant. Volatility is anticipated as investors grapple with the implications of Biden's exit and the potential for new economic policies under different leadership. "Biden stepping down is a whole new level of political uncertainty," said Gina Bolvin, President of Bolvin Wealth Management Group. "This may be the catalyst for market volatility that is overdue."
The bond market, particularly U.S. government bonds, has already shown reactions to political developments. Long-dated Treasury yields briefly rose following Trump's strong debate performance and subsequent assassination attempt but retreated on signs of economic weakening. Investors are now re-evaluating the potential for inflationary policies and a more fiscally expansive stance under different administrations.
Analysts suggest that the political uncertainty might also impact congressional races, potentially leading to a divided government. "A divided government, if it does materialize, would mean much lower yields than we currently have," said Brij Khurana, fixed income portfolio manager at Wellington Management Company. Jamie Cox, Managing Partner of Harris Financial Group, added that markets might now reprice expectations of congressional control. "The Senate is very likely to go Republican but the House of Representatives is very vulnerable to a Democrat takeover," Cox noted.
