Wall Street is deliberating the U.S. political outlook as President Joe Biden’s withdrawal from the presidential race brings with it uncertainty. Biden dropping out of the election has removed a key overhang from the election. Since his disastrous performance in the June debate, many analysts were anticipating a higher likelihood of a Trump victory in November. However, Biden’s endorsement of Kamala Harris has muddied expectations for who will win the election. “It’s added uncertainty to the positive side for the Democrats, because, in a sense, they got what they wanted, which was a younger candidate, because a majority of Americans polled thought that President Biden was too old to stand for reelection,” said Sam Stovall, chief investment strategist at CFRA Research. “Now the question is, well, is Trump too old, with his being 78 years old, and constantly harping on shark bites?” “We will continue to have both bulls and bears because you have both sides who are talking about the uncertainty, increased uncertainty regarding the presidency,” Stovall added. Many investors say it’s still too early to determine what the election outcome will be. With more than 100 days left until the election, and the Democratic National Convention on the calendar for next month, they expect more information will be needed on the contenders and their policies. A ‘Red Wave’? Despite this weekend’s events, some on the Street still think that a “Red Wave” — meaning a Trump presidency, and Republican control of both houses in Congress — remains the most likely scenario. Since the announcement of Biden’s departure over the weekend, PredictIt was last showing a 61% chance of a Trump victory, compared to a 39% likelihood for Harris. That could be good news for stocks, according to CFRA’s Stovall. Historically speaking, since World War II, the first calendar year under a unified government under a Republican candidate results in a “better than expected” average return of nearly 13% for the S & P 500 , the strategist found. To be sure, the data encompassed eight years following a Republican sweep, compared to 24 occurrences following a Democratic sweep. Stovall said the next likeliest scenario is a Democratic candidate with a split Congress, an outcome that would still be positive for markets. That scenario has historically led to a 16% jump in stocks, compared to the 10.6% average. “It seems as if the greatest likelihood is a red wave,” Stovall said. “And if not a red wave, then most likely a split Congress.” Trump trade hurt? To be sure, Sunday’s announcement could pump the brakes on the so-called Trump trade seen since the late-June debate. Sectors that analysts have identified as potential outperformers under a second Trump presidency, including energy and financials, have done so since the debate, up 4.5% and 1.6%, respectively through Friday’s close. Health care, another sector that’s up since the debate, could also face pressure. XLV mountain 2024-06-27 XLV since June 27 “We could see modest give-back in the services “Trump Trade”, with Medicaid / Exchanges / Hospitals benefiting and Med Adv underperforming,” Wells Fargo analyst Stephen Baxter. “Whether that momentum builds would likely depend on how polling develops in the coming weeks, both for the presidential race and also for key congressional races.” “Key questions include whether Harris is challenged by other Democrats, an eventual VP candidate, and whether differences in platform emerge,” Baxter added. One stock that could benefit, according to Oppenheimer, is online advertising company Trade Desk . “We expect an acceleration in political advertising, which should disproportionally benefit TTD,” the firm said. ‘A fool’s errand’ That said, some market observers think the key drivers for stocks will continue to be the outlook for interest rates, and company fundamentals, rather than the election outcome. In fact, some investors warned against the pitfalls of trading around the election, even if there were better clarity on who might win. “Any trade, fill-in-the-blank trade, never works out, only in so much as it’s very easy to say things on the campaign trail that are very difficult to put them into practice,” said Art Hogan, chief market strategist at B. Riley Wealth. “Whether it’s fiscal policy changes or sweeping changes to the way that government both collects and spends money.” Hogan warned against investing in the so-called Trump trade that put an emphasis on the oil and gas companies, over alternative energy stocks, saying the latter were the one to perform better than expected under Trump’s previous administration. “It’s always been a fool’s errand 100 days before an election to try to set something up with the anticipation of a new administration,” Hogan said. Ultimately, Kim Forrest, chief investment officer at Bokeh Capital Partners, said what could drive stocks higher will be results from the second-quarter earnings season, currently underway. This week, roughly one-quarter of S & P 500 companies are set to report, including some from key mega-caps such Microsoft. “It really depends on what earnings are,” Forrest said. “At the lowest level, what we’re doing is buying and selling cash flows. And if the cash flows look like they can still go up, we buy.” — CNBC’s Fred Imbert contributed to this report.
