After Biden: What comes next?

Following the historic decision by President Biden to drop out of the 2024 race, Raymond James CIO Larry Adam provides insight into his team's economic and market outlook.

To read the full article, see the Thoughts on the Market publication linked below.

Election cycles are unpredictable, and the 2024 presidential election cycle has proven to be no exception with President Joseph Biden choosing to drop out of the race. Following the historic announcement we’re diving into the questions that are top of mind for investors – how will President Biden’s decision not to seek reelection impact the economy, fixed income and equity markets?

What is the impact on the equity market?

Going forward, with Vice President Kamala Harris likely entering the race against former President Donald Trump, our short- and long-term equity market views remain unchanged. With valuations in the 93rd percentile relative to history, we remain cautious on the equity market in the near term as a lot of good news has been priced into the market and investor optimism has reached extreme levels. However longer term, with earnings likely to move higher (as we do not forecast a recession), $6 trillion of cash on the sidelines, and as we are in the infancy of this current bull market, we would use any periods of weakness as an opportunity. The 2Q24 earnings season that ramps up this week and next will be very important to assessing the health and earnings growth of companies going forward.

We cannot emphasize enough that politics is only one of ten factors in our equity outlook framework. While politics can drive headlines and induce short-term volatility (both up or down), it only ranks eighth in the ranking of the most influential driving factors. The reason? Macro factors such as economic growth and Fed cuts, and fundamental metrics such as earnings growth and valuations are more important in determining the trajectory of the market. Case in point: the Energy and Financials sectors were the two best-performing sectors in the week following Trump’s election, as a deregulatory agenda boosted expectations for these sectors during his Presidency. But they ended up being the worst performing sectors, as macro factors such as reduced demand because of COVID pressured the energy sector and record low interest rates were a headwind for Financials.

Fast forward to today, the recent rotation into small-cap stocks has been explained by market pundits as “the market pricing in a potential Trump victory”. We see this as misguided. Instead, we believe the rally has been fundamentally justified as interest rates have fallen (and small-cap companies rely on debt financing), imminent Fed rate cuts (as inflation reports have shown a significant slowdown in pricing pressures), and the potential for small-cap stocks to exhibit their first quarter of positive EPS growth in six quarters in 3Q24. In many ways, the recent increase in the probability of a Trump win (and sweep) is coincidental with the fundamental improvement in small-cap stocks prospects.

What is the impact on the economy?

As VP Harris likely represents a continuation of President Biden’s policies, there is no real change in our short-term economic outlook. With limited capacity for additional government spending on the horizon given budgetary constraints, the consumer will need to be the driving force of the economy. A softening labor market, rising delinquencies and a slowdown in travel-related spending is likely to lead to weakness in spending moving forward. As a result, we expect two Federal Reserve (Fed) interest rate cuts this year likely beginning in September to help the economy avoid a recession. While political rhetoric will abound if the Fed cuts, we view the Fed as apolitical and doing what it believes is in the best interest of the economy, not the political class. Longer term, the extension of (or lack thereof) the 2017 tax cuts is likely to impact the economy, but that does not occur until the end of 2025.

What is the impact on fixed income?

We expect the bond market to be driven by the fundamentals of economic growth and inflation. And with both likely on a downward trajectory, interest rates (particularly the 10-year Treasury yield) are likely to move lower by the end of this year toward 4%. With the Fed expected to begin cutting interest rates, the yield curve is likely to steepen with shorter-term rates falling faster than longer-term rates.

However, we are mindful of the burgeoning risks associated with the supply/demand dynamics. The trajectory for policy and the impact on government spending should not change with Vice President Harris entering the race. Admittedly, neither Republicans nor Democrats have really focused on containing the national debt. Both administrations added significantly to the overall level of debt (Trump +$8 trillion, Biden +$7 trillion). The good news: until now, the bond market has absorbed the additional issuance from increased spending as retail investors have picked up their pace of buying. Until demand starts to wane (not our base case yet but we continuously monitor), the market should remain reliant on the fundamentals of growth and inflation.

Bottom line

President Biden electing to drop out of the presidential race does not materially impact our view of the current standing of the race. The view of our political team continues to favor former President Trump; however, the potential for a Republican sweep probably gets more challenging as the shift at the top of the ticket is likely to help some down-ballot candidates. However, with over three months to go, the race is far from over and a lot can change between now and November 5. From an asset class perspective, our views are unchanged as current macro factors such as economic and earnings growth and a likely Fed cut in September remain intact. As always, as we approach election day, we will keep you apprised of our latest thinking and how it could impact on the economy and financial markets.

Read the full
Thoughts on the Market

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