- A string of primary election wins for former Vice President Joe Biden is contributing to Wednesday’s rally and is likely to reassure investors, according to market strategists.
- They say traders were growing worried that Bernie Sanders would win the Democratic nomination and that President Trump’s odds of winning as second term were diminishing.
- A contest between Trump and relatively moderate Democrat Biden might be one Wall Street can live with because it doesn’t threaten huge regulatory reforms or economic shakeups.
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Which has been through more twist and turns over the last few weeks: The stock market or the presidential primaries?
Stocks climbed Wednesday after former Vice President Joe Biden put up a strong showing on Super Tuesday, winning at least nine out of 14 states that voted and forcing yet another rival out of the race. It’s an outcome that looked unlikely from early February until Biden’s big win in the South Carolina primary Saturday.
The main cause of the market’s plunge in the last two weeks was the coronavirus outbreak, and investors’ fears about how much economic damage it will cause. But experts say the Democratic primary process was a significant factor as well.
For one, Wall Street critic and “democratic socialist” Bernie Sanders did well in the early states while billionaire businessman and former New York City Mayor Michael Bloomberg struggled in debates and polls. At the same time, some investors feel the Trump administration’s response to the outbreak may have dented the president’s chances at re-election.
“The 2020 election has also played a significant role (in the selloff) due to Sanders’ YTD surge and Bloomberg’s post Nevada stumble,” wrote Lori Calvasina, head of US equity strategy for RBC Capital Markets. “Trump’s stumble is a problem for the stock market, which has been baking in his re-election in November.
She continued: “Since last July, Trump’s odds in the betting market and price action in the S&P 500 have been moving in lockstep with one another.”
Expectations for a Biden presidency
But just as traders were caught off guard by Sanders’ results in the first few states, they’re glad to see signs Biden might be pulling into the lead. He’s called for slightly higher taxes on corporations and the wealthy, for example, hasn’t joined Sanders’ and Senator Elizabeth Warren’s calls to restrict stock buybacks or create new wealth taxes, all of which could affect both corporate strategy and investment decisions.
“Wall Street will be happy to see either President Trump re-elected or a Biden Presidency,” wrote Edward Moya, senior market analyst for OANDA. “One of the biggest risks to the outlook for US stocks was having Bernie Sanders (and all his regulatory threats on tech and healthcare reform) win the presidency.”
David Kelly, chief global strategist for JPMorgan Asset Management, said on a conference call that the wins for Biden have diminished the threat that not only would Sanders win, but that Democrats would win full control of the government, enabling them to attempt larger-scale reforms.
“A political tail risk has diminished,” he said. “The election of a left wing candidate in a Democratic sweep would probably be regarded as a negative for markets.”
That said, he still thinks there’s a chance Democrats can win full control of the House and Senate under Biden. But even that scenario may be one that markets can live with.
Calvasina of RBC adds that investors she’s surveyed preferred Bloomberg to any other Democratic nominee, but as the primaries have gone on, growing numbers of them are seeing a potential Biden win as positive for stocks. Almost none of them felt that way about Sanders or Warren.
The most extreme example of that bullishness, where Biden’s agenda is seen as starkly different from Sanders’, is visible in Wednesday’s huge rally for health care companies. Calvasina of RBC adds that health care “has had a decent relationship with Biden’s odds in the betting markets for quite some time.”
While investors look glad to see Sanders fall behind in the race, but Kelly and other experts emphasized that the lesson they should take away is that the campaign can change rapidly again, and it’s dangerous to make assumptions about the outcome.
“There is a major chance that we will not know the nominee until July,” wrote John Vail, chief global strategist for Nikko Asset Management. “The fate of Congress is very important too and is highly unpredictable in an increasingly negative virus and economy scenario.”