As people increasingly doubt whether US President Biden will still be a candidate for re-election in 2024, some investors are preparing to gamble on potential economic scenarios and trades when a stronger Democratic candidate appears.

Biden performed poorly in a televised debate with Republican opponent Trump last month, and US bond yields subsequently rose. With more and more people speculating that Trump will return to the White House on November 5, investors are predicting an increase in fiscal deficits and inflation policies.

Which party takes the White House will determine key issues in US future trade, regulation and fiscal policies. The US stock market rose last week, in part because some investors predicted tax cuts and less regulation with a Republican win.

Biden emphasized his intention to seek re-election in a news interview last Friday. However, as more and more Democrats call for Biden to drop out of the race, a senator plans to hold a senatorial meeting on Monday to discuss Biden's candidacy. This uncertainty could make economic predictions complex and cause market fluctuations.

Michael Schulman, Partner and Chief Investment Officer of Running Point Capital Advisors, said, "If there are potential political changes, they will increase market uncertainty for the stock or bond market. Investors must be prepared with a strategy for what to do if Biden is no longer a presidential candidate."

If Biden drops out, Vice President Harris is the leading contender to replace him, according to sources.

Michael Reynolds, Vice President of Investment Strategy at Glenmede, said, "The market will have to figure out in real-time what a new potential candidate represents, including issues such as tariffs and expiration of tax cuts."

Some people in the market expect that Harris will not substantially change US economic policies. Alex McGrath, Chief Investment Officer of NorthEnd Private Wealth, said, "I do not think there will be clear policy differences."

According to a report released by Kaitou Economics last week, Harris or alternative candidates such as California Governor Newsom will avoid proposing any major proposals, and the general direction is expected to be very similar to Biden's.

"If Biden drops out of the race, the resulting uncertainty could lead to short-term market sell-offs, especially since the current stock market is overvalued," said John Lynch, Chief Investment Officer at Comerica Wealth Management. According to LSEG Datastream, the S&P 500 index's 12-month expected PE ratio is 21.4 times, while the long-term average level is 15.7 times.

"In an expensive market, people's nerves may be tense," said Lynch.

Some bond investors say that the appointment of a new nominee gives the Democrats a greater chance and may lead to a reversal of the bond sell-off after the debate.

"If a new presidential candidate comes in... perhaps the Democratic Party will be able to recover some lost ground, leading to a divided government," said Jack McIntyre, Fixed Income Investment Portfolio Manager at Brandywine.

Currently, Congress is divided, with Republicans slightly controlling the House of Representatives and Democrats controlling the Senate. A divided government is often viewed by investors as a favorable factor for the market as it reduces the possibility of major policy changes.

McIntyre said that US bonds may benefit from this because it would reduce the likelihood of implementing excessive fiscal stimulus due to Republican majorities. He added, "It is premature to make structural reform around the election, but we are in a window period where it will certainly become more important in investment and asset allocation decisions."

Since the Trump-Biden debate on June 27, the S&P 500 index has risen by more than 1%.

Peter Tuz, president of Chase Investment Counsel, said that Trump is more likely to win after this debate, which could be a factor in the benchmark stock index's rise. Tuz said, "I am sure that among some investors and potential investors, they think that the possibility of seeing a pro-business president or at least a more pro-business president than Biden is higher and have invested in the market."

However, Sam Stovall, Chief Investment Strategist at CFRA, said that the average annual return of the S&P 500 index under a Democratic presidency since 1945 is 11.1%, while that under a Republican presidency is 7.1%.

Investors say that Trump's re-election may mean a reduction in corporate taxes, which could boost the US stock market, while trade relations will become more difficult, which may benefit domestic manufacturers but be disadvantageous to multinational companies if Trump imposes higher tariffs on imported products, as other countries may retaliate.

In specific areas of the market, the expectation that Trump will seek to reduce regulation is seen as favorable to financial and small-cap stocks, and solar and other clean energy companies are expected to benefit more from a Democratic government.

Schulman said, "This is very delicate and uncertain, and even if the election results you predicted are ultimately correct, the stock market's reaction may be different."

Editor/new