Today many US states are concurrently holding primaries, which are critical for presidential hopefuls to secure delegates. Incumbent President Joe Biden is expected to secure the Democratic nomination. The race for the Republican nomination has been more competitive, but former President Donald Trump is heavily favored. Betting markets now assign a more than 90% probability of him securing the nomination, following his decisive victories in Iowa, New Hampshire, and South Carolina, which have significantly outpaced Nikki Haley.

If Biden and Trump secure their party nominations, a closely contested presidential election is likely. President Biden’s approval ratings have recently dipped to 38%—near the lowest of his term—according to Gallup. Historically, low incumbent approval ratings have signaled challenging re-election prospects. In the past 75 years, three presidents had an approval rating lower than 40% in the final year of their first term and all failed to win a second, including Trump (38% in 2020). Despite both candidates being prominent within their parties, an electoral rematch between Biden and Trump may not be the preferred choice for voters. Moreover, Trump’s ongoing legal issues add to the unpredictability of the election.

Taken together, we expect the current political climate to contribute to market volatility as the election approaches. The uncertainty surrounding US leadership and policy direction is likely to cause some investor unease. More specifically, sectors that have benefited from President Biden’s legislative initiatives—such as the Inflation Reduction Act, CHIPS Act, and infrastructure bill—could see some volatility if polls show Trump gaining momentum. Still, political sentiment is transient, and historically the stock market’s reaction to US federal elections has shown little correlation to the party in power. Investors should not build investment strategies by speculating on political outcomes. Factors such as global economic conditions, central bank policies, and starting valuations better explain equity performance.

Sean Duffin, Senior Investment Director, Capital Markets Research