Biden Throws The American Market Into Turmoil (Again.)
OPINION: Biden exits, while Trump-trade makes a comeback.
Amidst discussions surrounding Biden’s exit and a new Democratic nominee, dinner-table rants and lunch threaps have centred around Harris’ potential appointment and the Democratic party’s future. An interesting and novel line of insight, however, zones in on the effects of the United States’ leadership shakeup — specifically, the ever-so-volatile equity market.
VOLATILE MARKETS
Investors generally sit happier in a stable and predictable market, and the significant political shift has disrupted both. The crux lies in the fiscal policies that the country’s leadership modulates: just a month ago, Trump spoke at a high-dollar, Republican political fundraiser, promising to loosen regulations on cryptocurrencies if elected in November, and to “get out of the way of innovation”. The Democrats, however, have long been crypto-skeptics; Gary Gensler — one of Biden’s earliest nominees in 2021 — and his approach to crypto had set the tone for broader administration policy despite the Securities and Exchange Commission’s (SEC) independence from the White House. Over the past three years, Gensler has not softened his critique of digital currencies. If anything, it’s tougher than ever. Over the past three years, Gensler has not softened his critique of digital currencies. If anything, it’s tougher than ever.
“This is a field where the leading lights from a couple of years ago are either in jail, about to go to jail or awaiting extradition,” Gensler said of crypto in a recent Bloomberg interview.
Investors are thus predicted to react differently depending on who rises as the new Democratic frontrunner, and their perceived policies towards businesses and the economy. As uncertainty over the election compounds, market volatility and investor discomfort stands to rise significantly. The Cboe Volatility index — Wall Street's "fear gauge" — touched its highest level since late April on Friday.
"Biden stepping down is a whole new level of political uncertainty," said Gina Bolvin, President of Bolvin Wealth Management Group. "This may be the catalyst for market volatility that is overdue."
TRUMP TRADE
The Trump Trade describes the shift in market behavior and investor actions in response to the economic policies and political moves — presumably tax policies lifting corporate profits while undermining the States’ long-term budget health— associated with a potential Trump presidency, especially after the disastrous televised debate last month. According to Trump's team, his policies geared towards economic expansion would reduce interest rates and diminish deficits. Concurrently, a significant portion of market participants anticipate that deficits would have continued to worsen should Joe Biden have secured a second term in office. President Biden’s exit from the presidential race earlier today might spur investors to unwind trades, hedging their bets upon a Republican victory and the subsequent increases in fiscal and inflationary pressures associated with Trumpnomics.
Swathes of the equities market, in particular small caps, have reacted favorably in recent weeks to the prospect of a Trump win. Cryptocurrencies have also rallied on inflation bets.
The most discernible impact was manifested with regards to U.S. government bonds, where long-dated Treasury yields — whose fluctuations are inversely correlated with prices — briefly rose, spurred by heightened anticipations that the Trump might reclaim the presidency after the Presidential debate and recent assassination attempt over the preceding weekend.
While yields promptly reversed course upon indications of economic slowdown, their initial shift underscored investors' expectations that a prospective Trump administration might implement inflationary measures and adopt a more expansive fiscal policy stance. However, Vice President Kamala Harris receiving the Democratic endorsement in lieu of Joe Biden, casting uncertainty on Trump's electoral prospects, is poised to induce investors to scale back on these speculative positions.
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Bibliography
Ferré·, Ines . “Stocks That Make up the Trump Trade.” Yahoo Finance, July 21, 2024. https://finance.yahoo.com/news/stocks-that-make-up-the-trump-trade-130017653.html.
Kniazhevich, Natalia, and Liz Capo McCormick . “Bloomberg - Are You a Robot?” Bloomberg.com, 2024. https://www.bloomberg.com/news/articles/2024-07-21/biden-exit-leaves-markets-asking-what-s-next-for-trump-trade.
list.metadata.agency. “Investors React to Biden Pulling out of Presidential Race.” mint. mint, 2024. https://www.livemint.com/news/world/investors-react-to-biden-pulling-out-of-presidential-race-11721587928413.html.
Reuters. “Biden’s Exit Could Spur Trump-Trade Unwind, Divided Government Eyed.” Reuters. Reuters, July 22, 2024. https://www.reuters.com/world/us/bidens-exit-could-spur-trump-trade-unwind-divided-government-eyed-2024-07-21/.