As the 2024 election race intensifies, investors are keenly observing how market trends correlate with the fluctuating odds of former President Donald Trump returning to the White House. The latest endorsement of Vice President Kamala Harris by President Joe Biden, who has stepped out of the race, has added another layer of intrigue, prompting many to speculate on the potential market impact of this political shift.
The Correlation Between Trump’s Prospects and the Market
Adam Turnquist, Chief Technical Strategist at LPL Financial, highlights a notable trend: the S&P 500’s movement appears increasingly aligned with Trump’s election odds. Since March, the market’s trajectory has mirrored the improving prospects of Trump’s victory. This trend is not necessarily an endorsement of Trump’s policies but rather a reflection of the market’s preference for certainty over uncertainty.
The Impact of Political Certainty on Market Performance
Turnquist explains that the market’s positive response to either candidate’s clear-cut victory underscores its aversion to political ambiguity. When Biden’s chances were stronger earlier this year, the market showed a similar positive correlation. This pattern indicates that investors favor scenarios where the political outcome is predictable, reducing the element of uncertainty that often causes market volatility.
Political Developments and Market Reactions
Following Biden’s wavering debate performance on June 27, questions about his viability as a candidate have grown, pushing Harris ahead in some betting markets as the potential Democratic nominee. Polls like the Suffolk University/USA Today survey show a slight shift towards Trump, who leads Biden by 3 percentage points in a crowded field, compared to a tie in the previous month.
In a dramatic turn, an assassination attempt on Trump at a rally near Pittsburgh correlated with a surge in Dow futures, highlighting the market’s sensitivity to political developments. Turnquist’s analysis reveals a rolling three-month correlation between Trump’s election odds on PredictIt and the S&P 500 at 0.31. While not exceptionally high, this correlation is stronger than many other economic indicators.
Comparative Analysis of Market Influences
Jeff deGraaf of Renaissance Macro Research points out that the negative correlation between Biden’s poll standing and the S&P 500, though not statistically significant, is more predictive of market performance than other factors like oil prices, Treasury yields, and Federal Reserve policies.
The prospect of a Trump victory, with potential extensions of his 2017 tax cuts and further deregulation, is seen by some strategists as market-positive. Morgan Stanley’s equity strategists, led by Mike Wilson, note increased investor interest in small-cap and cyclical stocks reminiscent of the post-2016 election rally. However, they caution that the current economic cycle’s maturity suggests a preference for quality and large-cap stocks.
Key Takeaways for Investors
Investors should brace for heightened volatility as the November election approaches, with the market’s performance in the three months leading up to Election Day historically predicting the election outcome in 20 of the past 24 instances. The incumbent tends to win if the market rises during this period and lose if it falls, providing a critical metric for investors to watch.
Conclusion
As the political landscape evolves, the intertwined relationship between election prospects and market performance underscores the importance of stability and predictability for investors. Whether it is Trump or Harris, the market’s preference for certainty will continue to drive its response to the unfolding political drama.
