Joe Biden (AFP)

With doubts growing about whether President Joe Biden will remain a candidate for re-election in 2024, some investors are preparing to game out potential economic scenarios and trades if a stronger Democratic candidate emerges. Bond yields rose following Biden’s stumbling performance against Republican rival Donald Trump in the first presidential TV debate last month. Growing speculation that Trump would regain the White House on Nov. 5 pushed investors to anticipate higher fiscal deficits and inflationary policies.

Which party holds the White House could determine key issues on trade, regulations and fiscal policies. US stocks rose over the past week partly as prospects for a Republican victory led some investors to expect lower taxes and less regulation. Biden was emphatic about seeking re-election in an interview with ABC News on Friday. However, some Democrats are increasing calls for Biden to halt his campaign and a meeting of senators was being planned by one senator for Monday to discuss Biden’s candidacy, according to a Reuters report.  The uncertainty could complicate economic forecasts and spur fluctuations in markets.

“For the stock market or bond market, if there’s candidate change it’s going to add uncertainty to the market,” said Michael Schulman, partner and chief investment officer at Running Point Capital Advisors. “Investors have to prepare a strategy for what to do if Biden is no longer the candidate.”

Vice President Kamala Harris is the leading contender to take Biden’s place in the Nov.5 election if he were to drop out, sources have said.

Some in the market expect Harris would not materially alter the Biden-Harris economic policy platform. Research firm Capital Economics said in a note on Friday that alternative candidates such as Harris or California Governor Gavin Newsom “would avoid making any major proposals and run on platforms that were very similar to Biden’s.”

If Biden were to pull out, stocks could sell off over the short-term because of the uncertainty following such a decision, especially given equities broadly are at high valuations, said John Lynch, chief investment officer for Comerica Wealth Management.

Stronger chances for the Democrats arising from the appointment of a new nominee could lead to a reversal of the Treasuries sell-off that followed the debate, which hit long-term bonds in particular, some bond investors said, the Reuters report adds. “If a new candidate comes in... maybe the election tightens up a little bit, which could lead to a divided government,” said Jack McIntyre, a fixed-income portfolio manager at Brandywine. Congress is currently divided, with the House of Representatives narrowly controlled by Republicans and the Senate by Democrats. A divided government is often seen by investors as positive for markets as it reduces the chances of dramatic policy changes.

Government bond prices could benefit as this would reduce the chances of excessive fiscal stimulus in case of a Republican sweep, said McIntyre. Price gains could be capped, however, as an economic slowdown could play well for the Republican campaign over the next few months.

The S&P 500 had gained over 1% since the June 27 debate between Trump and Biden.

A greater chance of a Trump win in the wake of that debate could be a “contributing factor” to the rise in the benchmark stock index, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

A second Trump presidency could mean lower corporate taxes, which could give a boost to US equity markets, and tougher trade relations and could be a boon for domestic manufacturers, investors have said, although a weight on multinationals at risk if there are higher tariffs on Chinese goods.

Among specific areas of the market, expectations that Trump would seek to reduce regulations are seen as benefiting financials and small cap companies. Solar and other clean energy companies are expected to benefit more from a Democratic administration.