Stocks and the Election Journey Immediately Ahead

Editors’ Note: This article delves into political developments from this weekend. Please note that MarketMinder favors no politician nor any political party, assessing developments solely for their potential impact on markets.

Questions abound after President Joe Biden exited the presidential race Sunday, but from an investment standpoint, the stock market is telling you everything you need to know: Uncertainty is falling and poised to fall further. The next few weeks and months will winnow things down to a nominee, a general election campaign including the respective platforms and—eventually—a winner. The emerging clarity should keep benefiting stocks, as is usual in election years’ second halves.

Interpreting short-term market movement is always a perilous path. Nevertheless, we think it is fair to say that if markets viewed Biden’s departure as a political earthquake that heightened uncertainty, it would show in Monday’s returns. Stocks generally hate high and rising uncertainty, and if that is indeed what we all got, then we would expect those nerves to manifest in a lot of red, downward arrows. Instead, the S&P 500 rose 1.1% on the day.^[i]

This tells us, despite the historic nature of President Biden’s stepping aside, markets weren’t caught off guard. This may seem strange, but given all the speculation, talk and urging from Democratic party bigwigs, his decision more likely drove uncertainty down a bit. Markets—not delivering an opinion on any candidate’s personality or quality, in our view—welcomed the picture fleshing out a bit.

Yes, we don’t yet have full clarity. We don’t know who the Democrats’ nominee will be and how the state-level polling will respond to a new name and face versus former President Donald Trump. There are three-plus months for that to take finer form ahead.

But there is a process, and stocks will see and digest it all. The Democrats begin their convention on August 19, and there they will nominate a candidate. Biden’s delegates are now, officially, unbound, rendering this technically an open convention. They could change this by holding a pre-emptive vote, but we have seen few signs that is likely now. And, given deadlines like Ohio’s September 1 mark to have a candidate on the ballot, a condensed primary doesn’t look realistic either.

So an open convention, like those from 1968 and earlier, looks likely. Any candidate who gathers signatures from at least 300 delegates can enter the fray. Once the list is set, delegates will vote in as many rounds as needed to whittle the field to a single nominee. 

At present, the main question is how wide open this field will be. But here, too, clarity is starting to emerge. Biden endorsed Vice President Kamala Harris in the race to succeed him and major Democratic politicians followed suit, including California Governor Gavin Newsom and Michigan Governor Gretchen Whitmer. Political analysts have long viewed both as Harris’s potential challengers, but they lined up behind her instead. Retiring Senator Joe Manchin, once a mooted candidate with the centrist No Labels group, has stated he won’t rejoin the Democratic party and run.

There is some murmuring about former First Lady Michelle Obama entering the race, due partly to her massive national popularity and partly to former President Barack Obama’s stopping short of endorsing Harris. But Obama’s statement, which deferred to the party’s process, largely echoes his words in 2020. It also isn’t clear that Mrs. Obama would want to leave her many post-White House projects for a return to the horrors of party politics. Stranger things, etc., but this seems like some party surrogates’ magical thinking rather than a realistic probability.

Campaign finances likely also play a role here. Getting fundraising machinery up in a hurry is a tall order. Perhaps the large Democratic donors who have openly called for a contested convention unite behind one or two challengers. But a handful have already rallied behind Harris, who also reportedly reaped $50 million in grassroots funding after Biden’s endorsement. She is also the only candidate who can use the Biden campaign’s funds, since she was co-registrant. Technically, these funds are available to her regardless of whether she is on the ticket as the presidential or vice presidential candidate. But it would be a very weird look for someone to challenge her at the convention, win, and then select her as running mate. Not impossible, but weird.

At any rate, with money and endorsements sliding into place, it looks like the party is coalescing around Harris. That is a bit more uncertainty falling. It likely falls further as we get official confirmation of the nominee. From there, we will get a campaign platform. The policy guessing game playing out in Monday’s news coverage—which projects biases and borrows from Harris’s rhetoric earlier in her career—will evolve into a more concrete discussion of actual policy proposals.

Meanwhile, as voters get to know the new nominee, they will tell pollsters their new voting intentions. Sites like 270toWin.com will update their maps, electoral vote counts and swing-state scenarios. We will see where the baseline is and whether the Democrats’ switch necessitates more resources diverting to states they once thought locked down.

In all likelihood, though, the map won’t change much. A new nominee gives voters something to think about, but opinions of Trump (pro and con) are already hardened and unlikely to change. Third parties, which may seem like a viable protest vote at this juncture, usually flop. People understand this and want their vote to count, so they tend to drift back to the two main candidates down the home stretch. Therefore, the results will probably still hinge on each party’s ground game in a handful of swing states (Nevada, Arizona, Wisconsin, Michigan, Pennsylvania and perhaps Georgia). That is a party-level thing, not a candidate thing. After all, the idea Biden’s exit would paint California or Oregon or any of the deep-blue states red is a fantasy. So having a new Democratic nominee probably doesn’t change things much.

Eventually, all of this will narrow down to a single presidential winner, as well as House and Senate results. Come November 5, investors will know which party holds the White House and whether it will have a friendly, split or opposed Congress. We will see how much gridlock is likely and whether legislation (or lack thereof) in the inaugural year is likely to ease fears or disappoint hopes. All of this will matter for stocks in 2025 and beyond.

But for 2024, the simple tailwind of falling uncertainty should be the main story, helping stocks in their typical late-year climb. Don’t let volatility along the way catch you off guard. It happens as talk and speculation stir fear. But over the balance of the year, as more pieces slide into place, stocks should enjoy having fewer questions.