Does Biden Want The Stock Market To Crash?
The inverse correlation between Biden’s ratings and S&P 500...
This week we explore:
Dear {first_name},
In a world where the “new normal” is just plain weird, it’s worth highlighting a particularly strange occurrence that has transpired since Biden’s election victory.
Joe Biden is officially the most successful president in history after his first year in office according to one metric: stock market performance.
To say this was unexpected would be a dramatic understatement.
Who can forget that during the 2020 campaign, President Trump warned that a vote for Biden was a vote against the economy, and, if Biden were elected the stock market would drop by 50%?
Trump hammered this message home and convinced many that a Biden win would see 401(k)’s and IRA’s drop by 50%.
Yet, over the last 12 months the exact opposite has occurred. The S&P 500 hasn’t fallen, it’s soared 37.5% higher. This isn’t just a spectacular first-year performance, it's the best one-year performance for any newly elected president in US history.
While this is certainly remarkable, what makes this truly strange is how little benefit Biden has received from this record setting performance.
Politics has often boiled down to one adage, “it’s all about the economy.” For most people the easiest way to gauge the economy is to look at the performance of the stock market.
This is a big lesson Biden could have learned from his predecessor.
Donald Trump, the king of branding, never missed an opportunity to claim victory when stock’s rose higher. Trump tweeted more than 100 times during his presidency about how great the stock market performed.
Trump made sure everyone knew that stocks were higher and that he alone was responsible. Trump made sure we all believed the economy was the stock market.
But Biden has not benefited from his own soaring stock market. In fact, Biden’s ratings have actually fallen in direct and inverse correlation to the stock market's boom.
Biden currently has a 38% approval rating. This is down 18% from the 56% highs he enjoyed after his inauguration back in February. Ironically, as Biden’s approval rating dropped 18% over that time, the S&P 500 rose 21% in a direct parallel!
We would be wise to ask ourselves why?
We believe there are two main reasons. The first is that Powell and the Federal Reserve have gotten all of the credit for the explosion in equities. Everyone knows we are “printing money” which is great for stocks. In fact, we believe Powell’s printer stole Trump’s thunder so effectively that it became an underlying reason for Trump's loss.
The second reason is even more problematic for Biden. It’s hard to claim that one’s platform of making billionaires pay their fair share while redistributing wealth from the 1% to the masses is successful when billionaires have enjoyed their greatest wealth growth in history under your first-year watch.
Making matters worse for Biden is that the moderate Senators (Manchin and Sinema) holding back his Build, Back, Better legislation have already ensured that the taxation promised on the rich will dramatically underdeliver.
The recent inclusion of the SALT deduction into Biden’s social spending bill looks to help the wealthy more than anyone else. This is perhaps bad branding for Biden, who wants to be seen as the president of equality.
The truth is that Biden has accomplished more for the wealthy than any president in history in his short term in office, but again, this is bad branding for his platform.
So while Trump was able to take much of the credit for the explosion in stocks, Biden has been unable to claim any at all. Biden is losing, and losing badly. A higher stock market has not helped his approval. If anything, an argument can be made that it hurt him.
Which leads us to question how can Biden turn it all around?
Well, if his ratings have slumped as stocks have soared, perhaps they would do the opposite if stocks were to fall? This may sound counterintuitive, but so is everything that is taking place right now.
Conventional thinking must be turned on its head. If our logic holds water, the obvious question is what would be the best way for Biden to shake things up and sink the market?
As we know, Biden has delayed his pick for the nomination of a new Fed Chair. While most Presidents pick their Fed Chairs before Halloween, Biden has yet to announce his pick.
The odds are heavily in favor of Biden nominating Jerome Powell.
Predictit.org has Powell at a 68% chance of getting Biden’s nod. The only other serious contender is Lael Brainard, who the site gives a 32% chance of success. So according to the market, Powell is the heavy favorite to win.
But Biden’s handlers must be aware of this inverse correlation and trend. That’s why we are wondering if Biden won’t use this opportunity to shake things up.
If Biden is to survive his term and put the Dems in position to win the midterms, he needs to make a dramatic change.
The prevailing logic is that the one thing Biden has going for him is the higher stock market. Nominating Powell provides Biden the best likelihood of maintaining the status quo as far as the market is concerned.
The main reason Brainard is a long shot is that she would not be as good for the stock market as Powell. But in today’s unconventional world, is this conventional thinking appropriate?
Biden has the perfect opportunity to turn convention on its head with an overhaul of the Federal Reserve. This is perhaps Biden’s best chance to shake things up. It’s the coach changing the quarterback at halftime when trailing by four touchdowns.
Biden may be limited in the things he can control, but he has a chance to implement wholesale changes at the Fed, with a total of 4 board governor positions open, including a new Fed Chair.
So while Powell is essentially a 68% favorite, we at Brentwood Research believe the odds are actually less than 50% for incumbent Powell, with Fed Governor Lael Brainard the likely nominee.
If this were simply a fiscal decision, Powell would already be signed, sealed, and delivered as Chair.
But Brainard is the best political decision. She offers a ray of light for Biden and could become a signature move for his presidency.
Should Biden nominate Brainard, it would send a clear political message that he is siding with the Democrats’ progressive bloc, led by Elizabeth Warren and Alexandria Ocasio-Cortez.
Warren has publicly voiced her thoughts on Jerome Powell, calling him a dangerous and evil man. If Biden chooses Powell he openly opposes Warren.
A Brainard choice, on the other hand, perfectly aligns with AOC and Warren for the progressive left.
While both share dovish, easy-money policies, Brainard has more of a socialist agenda, with a focus on women’s rights, employment, and erasing wealth inequality.
That last point is where the two candidates really diverge.
In February, Powell told Elizabeth Warren that the Fed is powerless to affect wealth inequality in the short term. But Brainard has argued otherwise and focused on the dangers of imbalanced wealth and income growth for years. She would arguably make wealth redistribution the signature of her reign as new Fed Chair.
Not selecting Powell could roil markets. The market loves certainty, and Brainard would bring uncertainty.
Should Biden nominate Powell, he casts his vote with moderates in the party. The market would continue as is, though that may not necessarily be a good thing for the president.
And if Powell isn’t picked, it could be extremely bad for the market in the short term. According to the Economic Times, 90% of economists expect Biden to keep Powell in the job, and predict a market slump should Biden side with Brainard.
But a market drop in the short term may be exactly what the current administration wants and needs. Better for the Dems that the market drops now, rather than closer to the midterm elections. This way they can build it back up heading into November.
As importantly, not removing Powell means The Fed gets all the credit should stocks continue higher.
Regardless, we’ll find out very soon which way Biden is leaning as he has promised to announce his choice within the next four days.
This means a weekend announcement could be in order that shakes up the entire presidency. Come Monday, it’s possible we could see significant market reaction in the form of volatility -- especially if Brainard and a flock of progressive doves are announced as Biden’s new Fed team.
While most are expecting the status quo, we are less sure. As we see it, the best political move for Biden is one that changes the entire direction of his presidency. This may require him to sacrifice stocks in order to elevate his personal approval ratings.
We understand it’s counterintuitive. It’s precisely why we think it’s the play.
Best,
Adam Baratta
Editor-in-Chief
Brentwood Research
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