Market Impact of Biden Dropping Out of the 2024 Election

President Joe Biden has officially dropped out of the presidential race, adding further uncertainty to the market outlook at an increasingly critical time. The announcement came shortly before 2 p.m. Eastern on Sunday, July 21, 2024, about four hours before U.S. equity futures opened at 6 p.m. Eastern. Biden’s decision came after days of rising pressure from fellow Democrats and reports that he was thinking about stepping aside.

In a post on X, formerly Twitter, President Joe Biden announced that he is withdrawing from the 2024 presidential race.

“While it has been my intention to seek reelection, I believe it is in the best interest of my party and the country for me to stand down and to focus solely on fulfilling my duties as President for the remainder of my term,” Biden wrote. “I will speak to the nation later this week in more detail about my decision.”

Since Biden’s disastrous performance in his first 2024 debate with former President and 2024 Republican nominee Donald Trump, Democrats have been rallying for Biden to withdraw from the race. Now that it has happened, how will this change impact finances?

Inflation has been a major concern for Americans over the past several years, with prices for everyday household goods, energy, housing, and more remaining persistently high despite the U.S. Federal Reserve’s interest rate hikes. With Biden’s withdrawal from the 2024 race, could we see immediate economic impacts?

The answer is complex and needs a thorough analysis of politics, the stock market, inflation, interest rates, and the relationships between these factors. Let’s explore these.

What causes inflation?

Before we can determine what a change in Democratic presidential candidates will have on prices, it’s important to understand the causes of inflation.

Essentially, inflation occurs when demand exceeds supply. This can occur due to supply shortages, as seen during the pandemic, or from increased demand, which happened after the pandemic.

When people are willing to pay more for something because it’s in demand and have the cash to spend, suppliers or retailers can increase prices. Additionally, an increase in the money supply also contributes to inflation, according to the Harvard Business Review.

David Moss wrote: “With more cash in their pockets and bank accounts, consumers often find new reasons to buy things. But unless the supply of goods and services has increased in the meantime, consumers’ mounting demand for products will simply bid up prices, thus stoking inflation.”

The Federal Reserve can attempt to control inflation by tightening the money supply, often by raising interest rates to make borrowing more expensive.

When borrowing costs rise, businesses find it harder to get credit. The stock market may fall, which means investors and consumers may experience less liquidity as they may not want to sell stocks at a loss.

So how does all this relate to the 2024 presidential race and Biden’s exit?

Political uncertainty and the stock market

Biden’s withdrawal from the race brings greater political uncertainty. Questions arise about whether the president will complete his term this year and how the new candidate will fare against Donald Trump, who currently leads in many polls.

Political uncertainty can lead to reduced consumer spending, as people may choose to save for an uncertain future. This could slow inflation.

The Dow Jones Industrial Average fell 1.3% and the S&P 500 dropped 0.8% amid speculation about Biden’s exit, MarketWatch reported.

Now that Biden is out, some of this political uncertainty may be resolved, potentially boosting consumer confidence. If the new Democratic presidential candidate is seen as bringing greater political certainty, the stock market could rise. This could increase liquidity and consumer spending, which could drive inflation higher.

However, experts like Alejandra Grindal, chief economist at Ned Davis Research, said in a recent report, “Policy uncertainty matters for stock market returns, but by no means does it come even close to being a significant driver.”

Effects on student loan debt and inflation

On July 18, 2024, Biden approved an additional $1.2 billion in student debt relief for public service workers, according to a U.S. Department of Education press release. This move benefits 35,000 Americans and could contribute to inflation.

The future of student loan debt policies will depend on whether a new democratic candidate can win against Trump in the upcoming election. If student loan debt forgiveness continues, it could slightly impact inflation. Without student loan payments, individuals will have more disposable income to spend on consumer goods and services, which could increase demand and drive prices higher.

The real drivers of inflation

During the June 27 debate, Trump accused Biden of causing recent inflation, “I gave him a country with no — essentially no inflation,” he said.

In turn, Biden blamed Trump for a stagnant economy. In reality, global events, supply and demand, interest rates and other factors influence inflation more than the person in the Oval Office.

5 potential impacts of Biden’s exit

1. Immediate reaction: increased volatility

Several experts argued that Biden’s withdrawal will increase market volatility.

Josh Thompson, CEO of Impact Health, said, “Investors generally prefer stability and predictability and such a significant political shift would disrupt both.”

He predicts an initial sharp decline in stock prices as investors look to hedge against potential risks.

Michael Collins, CFA, founder and CEO of WinCap Financial, agreed, saying that that the change in leadership could lead to increased uncertainty and volatility in the market. Collins believes that Biden’s exit would almost guarantee a victory for Trump.

2. Potential boost for U.S. equities

Some experts suggest that Biden’s exit could help U.S. equities.

Timothy Holland, CFA and chief investment officer at Orion, said Biden’s likely successor, Kamala Harris, might be seen as a weaker candidate against Trump. However, he believes this could actually support U.S. equities as Wall Street starts to contemplate and price in a fiscal policy backdrop with both the extension of the Trump Tax Cuts and incremental government spending, particularly on the military.

Holland added that this combination could stimulate the U.S. economy and boost corporate profits in the short to intermediate term, potentially driving stock prices higher.

“That said, accelerating economic growth could also push inflation higher longer-term, forcing the Fed to pivot from the expected rate cuts in 2024 to rate hikes in 2025 or 2026,” he said.

Stephanie Vaughan, co-founder of Veda, also said there would be positive outcomes for the U.S. equities market following Biden’s departure.

“Picking Kamala Harris would certainly create a situation in which Trump would be more likely to win,” she said. “And Trump is clearly pro-growth and pro-innovation — both of which the American economy is sorely in need of now. Assets, therefore, would almost certainly benefit.”

3. A potential boost for gold and silver

Peter Earle, a senior economist at the American Institute for Economic Research, suggests that any subsequent reaction will depend on the specific candidate.

He explained that uncertainty around the new candidate often benefits gold and silver.

Earle said, “With uncertainty about who the candidate will be, investors will seek a safe haven until they can assess whether or not the replacement for Biden will continue or break from the high (and possibly higher) tax, more regulation, and more government intervention policies of the Biden administration.”

He also said that until that can be determined, investors may move towards safer stores of value.

Thompson agreed that a sitting President’s withdrawal from a reelection race is an unprecedented event, likely to increase fear and caution among investors.

4. Impact on bonds

According to Holland, although the data is limited, post-presidential debate bond yields moved up and bond prices fell as Wall Street considered the possibility of a Republican Election Day sweep and the likely extension of the Trump Tax cuts, along with increased government spending, particularly on the military.

If President Biden’s most likely replacement is seen as a weaker candidate against President Trump, a similar pattern in bond yields and bond prices could emerge, Holland said.

5. Impact on crypto

Vaughan said the crypto markets might experience a rally following Biden’s exit from the race.

“Most notably because a Trump presidency would be far more productive toward the crypto ecosystem as a whole,” she said.

Em resumo

Biden’s withdrawal from the 2024 presidential race could affect various mercados financeiros. Increased political uncertainty, shifts in inflation, and changes in investor sentiment could all play a role in shaping the economic environment. As the new political scenario develops, investors should keep an eye on these changes and adjust their strategies accordingly.

INFORMAÇÃO LEGAL IMPORTANTE: Esta informação não deverá ser considerada como aconselhamento ou recomendação ao investimento, mas apenas como comunicação de marketing.