After the failed TV debate last week, President Biden's re-election campaign seems to be in jeopardy, and investors may be concerned about whether the Democratic candidate changes will impact the stock market, which is understandable.

A good way is to look at how the market has reacted to the competition between Biden and Trump so far.

Adam Turnquist, Chief Technical Strategist at LPL Financial, said in a phone interview, "The market's trend has always been consistent with Trump's November victory odds." When the market and Trump's prospects of being elected began to be in sync in March of this year, Turnquist first pointed out the change in the relationship between the two.

But he cautioned that this does not mean that market participants will necessarily support Trump's policies.

"I don't think you can say that the market is up because Trump's chances of winning have increased," Turnquist said. "But we know that the market doesn't like uncertainty."

Therefore, as Trump seems more certain of victory, the market also feels reassured by this certainty. Turnquist points out that earlier in 2024, when Biden was bullish on winning, the market also showed a positive correlation with his re-election chances.

In other words, the market seems to have responded positively to the prospect of either candidate winning. Meanwhile, the chaos on the Democratic candidate list may further enhance the certainty of Trump's victory, or even Republican wins in the congressional elections.

Since Biden's stumbling and sometimes incoherent performance in the June 27th debate, speculation about his withdrawal from the race has intensified. Democratic politicians have expressed concerns about Biden's health and abilities afterwards. White House press secretary Carin Jean-Pierre told reporters on Wednesday that Biden "absolutely will not" withdraw from the race.

On some betting markets on Wednesday, Vice President Kamala Harris was more popular than Biden in the race to become the Democratic nominee. Meanwhile, as of Wednesday, PredictIt predicts a 59% chance of Trump winning, while Biden's chances of winning have dropped to around 16%.

A post-debate poll showed that although the competition is still intense, Trump's approval rating has declined. A Suffolk University/USA Today poll released on Tuesday showed that among the six candidates, Trump led Biden by three percentage points, while the support for the two candidates was the same a month ago.

Turnquist provided the chart below, which shows the three-month rolling correlation between Trump's prospects and the S&P 500 (SPX) based on PredictIt's predictive market, currently at 0.31.

Of course, this number is not particularly high. A correlation of 1.0 means that Trump's odds of winning and the market are in step, while a negative correlation of -1.0 means that they are developing in exactly the opposite direction.

However, this correlation has always been stronger than other factors. For example, the correlation between the 10-year US Treasury yield (a relatively important macroeconomic factor) and other factors is roughly zero, which means that they currently have almost no impact on each other.$S&P 500 Index (.SPX.US)$

On the other hand, Jeff deGraaf, founder of Renaissance Macro Research, pointed out last week that despite statistically insignificant negative correlation between Biden's poll rankings and the S&P 500 index performance, it is more explanatory of this year's stock market performance than any other factor (including oil prices, Treasury yields, Federal Reserve policy, corporate bond spreads, purchasing manager index readings, inflation data, and GDP).

Some investors and strategists believe that the prospect of a Trump victory is indeed beneficial to the market, as it could broaden its 2017 tax cuts and further relax regulation.

Stock strategist Mike Wilson of Morgan Stanley and others said in a report on Monday that following the debate last week, clients have shown interest in small cap and cyclical stocks that have benefited from Trump's victory in 2016. But they warned that investors should be aware of the important differences between now and then.

"First, we believe the data shows that today's cycle is more mature, which supports a preference for quality and large cap stocks," they wrote. "In addition, in 2016, the market favored inflation/recovery policies because the economy was recovering from the 2015 manufacturing/commodity recession and inflation was not a hurdle for consumers overall."

In fact, the prospect of a wider extension of tax cuts and other measures, although neither Biden nor Trump would take many steps to control the budget deficit, is believed to be the reason behind the sharp rise in U.S. Treasury yields after the debate.

Turnquist said that one important thing investors need to remember is that as November approaches, market volatility in election years tends to intensify.

Another important issue to keep an eye on is how the stock market performs in the three months leading up to the November 5th election day. Terence Kuester pointed out that in the past 100 years, the market's performance during this period has successfully predicted 20 out of 24 election results - when the market rises, the incumbent president tends to win, while when the market falls, the incumbent president fails.

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