CIO special podcast: Biden withdraws, what’s next? (5:08)
President Biden's exit shakes up the presidential race dynamics. CIO’s Jon Gordon has the investment implications.

Thought of the day

What happened?

US President Joe Biden has withdrawn his candidacy for a second term in office and endorsed Vice President Kamala Harris as the Democratic nominee. The announcement was made after weeks of deliberation following a disappointing performance in a debate with Republican nominee Donald Trump on 27 June.

The president had been on the receiving end of pleas to withdraw from the race from increasingly senior Democratic Party leaders and top donors skeptical of his ability to govern for another four years.

Former President Trump’s polling lead—both nationally and in swing states—had also widened following a failed assassination attempt last weekend.

Democrats will now need to select a new nominee at their convention in Chicago from 19–22 August. Vice President Kamala Harris is widely seen as the front-runner.

What comes next?

The focus will now shift to the confirmation of a new Democratic nominee, whether there will be any material differences in their policy priorities that could affect markets, and whether the new nominee will be more likely to defeat former President Trump in November.

First, Biden’s withdrawal and subsequent endorsement of Kamala Harris leaves her well-positioned to capture the nomination. But she still must convince convention delegates, who are no longer bound to support Biden, that she is the individual best positioned to defeat the Republican nominee in November. We expect Harris to emphasize the continuity of Biden’s platform, her service as vice president, and her ability to appeal to women, younger voters, and voters of color.

Other candidates may emerge prior to the convention, including a handful of governors who could argue that their net favorability ratings are higher than the vice president’s. However, Harris has another point of leverage, which may prove conclusive. In the Biden campaign’s filings with the Federal Election Commission, she is included on the statement of organization, which means that she will encounter fewer legal obstacles in the use of the Biden campaign war chest.

Second, we would not expect a major shift in policy priorities from any of the top Democratic contenders on the issues of concern for investors. The continuity would be the clearest if Harris becomes the nominee. But we would not expect any Democratic nominee to deviate significantly from Biden’s focus on climate change, increasing scrutiny of anti-competitive practices by large businesses, and maintaining pressure on China over its trade practices.

Third, Biden’s chances of re-election were undermined by his faltering debate performance on 27 June. It is also possible that Trump’s defiant response to last week’s assassination attempt could consolidate the support of his base, and even win over some undecided voters—though this is not yet clear. Prior to Biden’s exit from the race, we had seen a 60% chance that Trump retakes the White House, with a 45% probability of a “red sweep.” We had also seen a 15% likelihood of a Trump presidency with a split Congress, a 30% probability of a Democratic win with a split Congress, and a 10% probability of a “blue sweep.”

Biden’s withdrawal resets the contest. However, to the extent that Harris is nominated to succeed Biden as the Democratic standard-bearer, we believe the dynamics of the election will not change as much as one might expect. The American electorate is highly polarized and most of Biden’s supporters will be reluctant to abandon the party’s nominee.

Over the coming months, we expect both political parties to focus on turnout in November as the critical factor in the outcome. Democrats must motivate younger voters. Republicans must encourage voters who prefer Trump to express that sentiment at the polls on election day.

We are also reluctant to draw too many conclusions from historical polling of hypothetical matchups between Trump and other Democratic contenders when Biden was the presumptive nominee. It will take time for polls to reflect voter preferences in what are no longer hypothetical matchups but rather real possibilities. Furthermore, we are mindful that there are still three-and-a-half months between now and election day.

Biden’s unprecedented decision to withdraw from the race poses a significant challenge for the Democratic Party but also forces the GOP to devise a fresh campaign strategy against a new and younger opponent.

How should investors respond?

The outcome of the election could be consequential for investors, especially if either party wins control of both the White House and Congress.

A Trump victory—especially if supported by a Republican majority in Congress—would likely raise market expectations of tax cuts and lighter business regulation, while adding to concerns over higher trade tariffs. Primary beneficiaries of regulatory changes could include the financial services sector, while higher tariffs on imports could harm US companies with global supply chains.

Meanwhile, a Democratic administration would likely continue to support initiatives benefiting green energy, efficiency, and electric vehicle makers.

In the near term, we should expect some market volatility as investors digest the news. We have seen some rotation toward “red” sectors and away from “blue” ones in recent weeks as recent momentum has favored the Republican Party. That could at least partially reverse in the coming days as markets parse the latest developments.

That said, investors should remember that US political outcomes are far from the largest driver of financial market returns, or even sector performance. Economic data and Federal Reserve rate-cut expectations remain at least as important. In addition, much can still change ahead of November's ballot and a range of outcomes remain possible.

We therefore advise investors against dramatic shifts in portfolio strategy based on their expectations or political preferences. Instead, we recommend various strategies to manage the risks surrounding the election, including holding a well-diversified portfolio and considering structured investments with capital preservation or yield generation features.

Our base case that the S&P 500 ends the year around 5,900, modestly higher than the current 5,505, would hold in most political scenarios—barring a Democratic sweep of power that leads to higher corporate taxes, or a scenario in which former President Trump imposes trade tariffs that are as high as proposed in his campaign speeches. We consider either outcome unlikely at present. In addition, we believe the positive outlook for top US tech companies is likely to more than offset political uncertainty.

We will continue to monitor campaign developments closely and will keep you informed about the potential implications for the election and markets at ElectionWatch 2024.