Investors chart possible moves as pressure mounts on Biden

NEW YORK, July 8 (Reuters) – With doubts growing about whether President Joe Biden will remain a candidate for re-election in 2024, some investors are preparing to game out potential economic scenarios and trades if a stronger Democratic candidate emerges.

Which party holds the White House could determine key issues on trade, regulations and fiscal policies. U.S. stocks rose over the past week partly as prospects for a Republican victory led some investors to expect lower taxes and less regulation.

“For the stock market or bond market, if there’s candidate change it’s going to add uncertainty to the market,” said Michael Schulman, partner and chief investment officer at Running Point Capital Advisors. “Investors have to prepare a strategy for what to do if Biden is no longer the candidate.”

“Markets are going to have to figure out in real time what a new potential candidate stands for,” including on issues such as tariffs and the potential expiration of tax cuts, said Michael Reynolds, vice president of investment strategy at Glenmede.

Some in the market expect Harris would not materially alter the Biden-Harris economic policy platform.

“I wouldn’t see an appreciable policy differential,” said Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth.

Research firm Capital Economics said in a note on Friday that alternative candidates such as Harris or California Governor Gavin Newsom “would avoid making any major proposals and run on platforms that were very similar to Biden’s.”

‘FRAYED NERVES’

“Nerves can be frayed in an expensive market,” Lynch said.

Stronger chances for the Democrats arising from the appointment of a new nominee could lead to a reversal of the Treasuries sell-off that followed the debate, which hit long-term bonds in particular, some bond investors said.

“If a new candidate comes in… maybe the election tightens up a little bit, which could lead to a divided government,” said Jack McIntyre, a fixed-income portfolio manager at Brandywine. Congress is currently divided, with the House of Representatives narrowly controlled by Republicans and the Senate by Democrats. A divided government is often seen by investors as positive for markets as it reduces the chances of dramatic policy changes.

Government bond prices could benefit as this would reduce the chances of excessive fiscal stimulus in case of a Republican sweep, said McIntyre. Price gains could be capped, however, as an economic slowdown could play well for the Republican campaign over the next few months.

“It’s a little too early to be making structural changes around the election, but we’re in that window where it certainly gets more important in the investment decision-making and asset allocation decision,” said McIntyre.

NO CERTAINTY FOR STOCKS

The S&P 500 had gained over 1% since the June 27 debate between Trump and Biden.

A greater chance of a Trump win in the wake of that debate could be a “contributing factor” to the rise in the benchmark stock index, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

“I’m sure among some investors and prospective investors seeing a higher likelihood of a pro-business president or at least a more pro-business president … has factored into decisions about putting money in the market,” Tuz said.

Still, since 1945, the S&P 500 has posted an average annual return of 11.1% when a Democrat has been president versus a 7.1% return when a Republican has held the office, according to Sam Stovall, chief investment strategist at CFRA.

“It’s very nuanced and uncertain,” said Schulman. “Even if you predict the elections right, how stocks react could go either way,” he said.

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