Volatility likely for markets but the 'Trump Trade' remains for now

With the timing of President Biden’s decision to withdraw from the US presidential race coming as a surprise even to many of his team, the markets are still digesting what that could mean for the election.

For now, the focus remains on earnings, monetary policy, and the potential for those companies most likely to benefit from a Republican win – the so-called Trump Trade – but beyond that there could be some choppy waters, even though there was high expectation that a new Democratic candidate may be in place before the November election.

Stock futures advanced Monday but Michael Wilson and his team of strategists at Morgan Stanley said that their focus is on the business cycle rather than the election outcome: "While markets have been digesting the rising odds of a Trump win, cyclical upside from here will likely be dependent on growth, in our view."

The uncertainty comes with several major implications. A Trump win is seen as fiscally expansionist but this would come with inflation risk. A new Democratic challenger, if they were to be deemed more likely to win than Biden, could see an easing of rising US bond yields and Bitcoin holdings.

“There was a lot of confidence about Trump winning, and markets won’t like this new uncertainty, along with the news cycle about who is in, who is out, and all those unknowns,” Gene Munster, co-founder and managing partner at Deepwater Asset Management told Bloomberg.

The US dollar edged lower early Monday but has been gaining on bets that President Trump will return to The White House. It’s small movement following the Biden announcement likely reflects the expectation that such an announcement would be forthcoming, and a pause to await updated polling.

Recent national surveys have seen little evidence that Kamala Harris would fare better in the election than Joe Biden, although the stats are close. A CBS/You Gov poll this month gave Harris 48% vs. Trump on 51% compared to 47% and 52% for Biden and Trump respectively. Fox News shows an unchanged share with 48% for Biden/Harris and 52% for Trump, while NPR/PBS/Marist maintains a win for the Democrats at 50% but with Trump closing the gap by one percentage point to 49% against Harris compared to 48% against Biden.

Although there is no certainty that Harris will be Biden’s replacement, for now she is the most likely and the vice president has been endorsed by Biden.  

“It is too early to tell if the ‘Harris trade’ will cause a bounce back in US equities after last week’s bruising declines,” said Kathleen Brooks, research director at XTB told Bloomberg. “Harris was considered tough on oil and anti-shale and fracking. Thus, her surge in popularity in just 24 hours could impact the US energy sector at the start of this week.”

Global stocks have reacted to the Biden withdrawal, with European stocks mostly higher contrasting with declines for Asia Pacific bourses.

Lindsay James, investment strategist at Quilter Investors, also believes market volatility is to be expected.

"Trump is favored but if Kamala Harris, or another nominee, makes inroads then the recent rotation may lose legs and that volatility could take over," she told Morningstar.