US President Joe Biden announced yesterday that was ending his bid for a second term as president and that he would not be the Democratic Party candidate in the presidential election in November. Market analysts have been trying to assess the effect of Biden’s withdrawal, which did not come entirely as a surprise, on financial markets.
Speaking to Yahoo! Finance, Josh Thompson, CEO of Impact Health USA, said, "Investors generally prefer stability and predictability and such a significant political shift would disrupt both." Thompson added that the immediate reaction could be a sharp fall in stock prices as investors try to hedge against risk.
Analysts told Yahoo! Finance that the identity of the new Democratic candidate for the presidency would have a critical effect on the market’s response. The frontrunner at present, and the person that Biden himself has endorsed, is Vice President Kamala Harris. Stephanie Vaughan, co-founder of Veda, said that, in the light of that, Biden’s withdrawal makes a victory for Republican candidate Donald Trump more likely, which will be positive for US stocks. "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," she said.
The effect of an increase in the likelihood of Trump being elected was seen in the markets after the Biden’s stumbling performance in the televised debate between them. The immediate response was a fall in yields on US Treasury bonds, while Wall Street tried to work out the significance of a Republican president, especially one expected to cut taxes and raise spending on the military. If the new Democratic candidate is perceived as weak in comparison with Trump, analysts say, a similar movement can be expected on the bond market.
What has happened historically?
The assessments are many, but no-one has a clear answer. The only moment in US history that bears comparison is the withdrawal of President Lyndon Johnson from the presidential race in 1968.
On the face of it, the Johnson precedent makes a rise in equities markets likely. Johnson announced his withdrawal on a Sunday (March 31, 1968). The next day, the S&P 500 rose 2.5%. Moreover, this was at a low point for US stocks, but the S&P 500 ended the year with a 15% return.
The differences between the two events are, however, greater than the similarities. Max Holland, a historian of the period, is quoted by MarketWatch as saying that, whereas Johnson’s announcement of his withdrawal came as a complete surprise to all but his inner circle, Biden’s withdrawal was being called for by many in the Democratic Party and by party supporters, and was widely predicted in the press and media.
Writing in MarketWatch, analyst Mark Hulbert says that, according to the theory of efficient markets, the capital market prices in expected events, responding before they actually happen. When they do happen, there is therefore hardly any movement on the markets. So while the jump in the S&P 500 in 1968 could be attributed to Johnson, the market should already have priced in Biden’s announcement.
Moreover, Johnson’s withdrawal was not the only event that impacted the market at that time. As well as dropping out of the presidential election, in October 1968, Johnson also announced that he had ordered the cessation of bombing of North Vietnam, which was unpopular among many in the US, if the North Vietnamese government indicated willingness to negotiate an end to the Vietnam War. This was known as the "October surprise". It was so significant that it is hard to distinguish the effects of the two announcements on the market.
Another factor is what Hulbert calls the contrarian response of markets to bearish sentiment, making it a bullish sign. He cites data according to which just 10.3% of market investors were bullish just before Johnson’s announcement, which is very low. By contrast, today bullish sentiment is close to an all-time high.
In the event, Republican candidate Richard Nixon won the presidential election in November 1968.
Published by Globes, Israel business news - en.globes.co.il - on July 22, 2024.
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