President Joe Biden withdrew from the 2024 presidential race and has endorsed Vice President Kamala Harris as the Democratic nominee, although the endorsement does not necessarily mean she will win the nomination. The change in the Democratic ticket does not change our fundamental view of the election, which we discussed at length in our recently released Midyear Outlook 2024: Eyes on the Prize.
While the announcement may be an important political moment, there is a strong tendency to think party politics has a much larger near-term impact on markets than it has historically. As we wrote in the Midyear Outlook, “One important concept we want to stress regarding election years is politics and investments don’t mix.”
Based on the initial reaction in prediction markets, which absorb information more efficiently in real time than other estimates of election odds (although that doesn’t necessarily mean they are correct), the change in the Democratic ticket may move the presidential race slightly closer to being a toss-up but is still categorized as leaning in favor of former President Trump. Again, taking our bearings from prediction markets the change slightly decreases the odds of a Republican sweep. Of course, that could change, but even a much larger swing would not materially change our view of the election outcome’s impact on broad markets.
Source: Bloomberg
Of course, the tumultuous events of the last month – the debate, the assassination attempt on former President Trump’s life, and Biden’s announcement – raises the obvious comparison to another tumultuous year in our country’s history, 1968. Note that the Democratic National Convention was held in Chicago in 1968 and is the locale for this year as well. Perhaps this is something the party will rethink in the future.
What Happened in 1968?
1968 started off with President Lydon B Johnson looking like the favorite to win re-election – his approval rating at the beginning of the year was 48%, 13%-points higher than his disapproval rating. However, the country was getting increasingly bad news from Vietnam after January, as the Tet Offensive was going poorly. It all came to a head on the night of March 12, 1968, when the nation was shocked by President Johnson clocking in less than 50% of the vote in the New Hampshire primary. Democratic party challenger, Senator Eugene McCarthy (at the time, a low-profile Senator from Minnesota) got more than 40% of the vote. Much like what happened with President Biden’s prospects after the debate last month, President Johnson’s political prospects collapsed. On March 31st, Johnson shocked the nation by announcing he would not run for re-election.
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That opened the door for Robert F. Kennedy to enter the race, on the back of the anti-Vietnam war vote, and it looked like he may coast to the Democratic nomination. But he was assassinated on June 5th 1968, after the California primary.
Ultimately, Vice President Hubert Humphrey was nominated as the Democratic candidate for President on August 29th in Chicago, but only after one of the most fraught political conventions in history. Meanwhile, President Nixon had easily won the Republican nomination three weeks prior to that. Nixon finally went on to win a close election by less than 1 percentage-point over Humphrey, with former Alabama Governor George Wallace playing spoiler – the election was just about 100,000-200,000 votes away from Nixon winning just a plurality but not a majority (270) of the electoral college, in which case the decision would have gone in front of the House of Representatives (for the first time since 1824).
All this to say, 1968 was a crazy year in American history.
But … The Market Took It All in Stride
The S&P 500 price index actually rallied 15% from March 31st (when President Johnson announced he wouldn’t run) through the end of the year. The index gained 7.7% over the entire year, and 11% in total return terms. That’s slightly above the long-term annual average. Almost like the political tumult didn’t matter.
A big difference between 1968 and 2024: The Economy and Inflation
The economy was also in a very different place in 1968. Real GDP actually grew 4.9%, but inflation was also rising amid a lot of fiscal spending (especially on the Vietnam war). Headline CPI inflation hit 4.7% by the end of the year, more than double the average of under 2% over the prior decade.
Ultimately, 1968 was the beginning of the end of the post-war boom. There was a “balance-of-payments” crisis in March. The US was running significant deficits, importing a lot more than exporting. This was mostly because the US was spending a lot of money overseas and importing a lot more goods from Europe (which by then had recovered from World War II). This resulted in a glut of US dollars abroad. But foreigners didn’t want to hold on to those dollars as they lost trust in the US, and instead, used those dollars to buy gold. This was the “gold rush of ’68”. It overwhelmed the dollar, and eventually ended the postwar financial arrangement of fixed exchange rates, when Nixon ended the convertibility of the dollar for gold in August 1971.
As a result of rising inflation, President Johnson and Congress agreed on a tax increase (a surtax of 10% on personal and corporate income), along with a $6 billion spending cut (~ 0.7% of GDP). On top of this, the Federal Reserve was also tightening policy to fight inflation. Tight fiscal and monetary policy are a recipe for choppy markets, which is what happened in the middle of the year. Despite that, markets ended 1968 higher by 11% as I noted above, mostly because policy wasn’t tight enough to restrain growth. However, 1969 ended with the S&P 500 falling 8.4% in total return terms.
We’re in a very different place now. Economic growth is running along trend, and most importantly, inflation is easing and the Federal Reserve looks poised to loosen policy by cutting interest rates. On top of that, both parties look ready to further increase the deficit, mostly by extending the tax cuts passed by President Trump and Congress in 2017. Defense spending is also surging, and cuts look unlikely. These are potential tailwinds for the market, and positive for corporate profits.
All this to say, the macroeconomic and policy backdrop is likely what will drive markets, as opposed to short-term political upheavals.
For more content by Sonu Varghese, VP, Global Macro Strategist click here.
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