Wall Street might actually be fine with Sanders moving to the front of the Democratic pack

Key Points
  • A potential matchup between Bernie Sanders and Donald Trump is being given greater possibility after recent developments.
  • Wall Street might like the scenario on the assumption that Sanders would be an easier opponent.
  • Stocks have done well under Trump, and might not do so under Sanders given his disdain for big business.
Democratic presidential candidate Sen. Bernie Sanders (I-VT) addresses supporters during his caucus night watch party on February 03, 2020 in Des Moines, Iowa. Iowa is the first contest in the 2020 presidential nominating process with the candidates then moving on to New Hampshire.
Alex Wong | Getty Images

The momentum of Bernie Sanders in the Democratic presidential field sets up a potential clash of polar opposites in November, one which Wall Street might relish.

A clash between President Donald Trump and the Vermont democratic socialist gathered more attention Tuesday amid reports that Sanders showed impressively the day before in Iowa and is pushing closer to the front of the Democratic pack.

"There is a lot of chatter that a Sanders nomination would roil markets, but there's another way to consider that possibility," Nick Colas, co-founder of DataTrek Research, said in his daily market note. "Investors may assume that Sanders' platform of radically remaking American society/commerce will not resonate with voters during a time of relative economic prosperity. That would make President Trump's reelection more likely, preserving a market-friendly tone to government policy."

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Stocks have been on a tear this week. While it's impossible to tell how much the changing political dynamics tie into that (if at all), there's clearly a sentiment across the investing community that a Sanders presidency, with its expected broadsides against wealthy Americans and big business, would be trouble for the market.

Wall Street, of course, has done well during the Trump years.

The Dow Jones Industrial Average has risen about 58% since Trump's election. Anything that suggests status quo, then, would garner support from the Street.

"There's enough of an analogy to hang your hat on," Colas said in an interview. "People reject an old-school socialism-oriented politician in factor of, 'Look, follow me. The future is bright and it can get brighter.'"

Predicting Trump vs. Sanders

No one knows yet what really happened in Iowa during Monday's caucuses due to a tabulation fiasco that left the Democratic Party in confusion. But Sanders' camp was claiming victory, and at least anecdotally, there were indications that former Vice President Joe Biden had underperformed.

With New Hampshire then Super Tuesday on the horizon, Sanders likely will continue to build momentum. Biden still leads nationally by 3.3 percentage points, according to the latest RealClearPolitics consensus, but things can change quickly when it comes to presidential politics.

PredictIt, a marketplace that allows bets on a variety of events including the presidential election, puts Trump well in front, with Sanders second and the rest of the pack well behind.

As the muddied electoral picture gets clearer, markets will start to make their bets. Trump against a Biden or Mike Bloomberg would present an entirely different choice than Trump versus Sanders.

"Trump now is starting to call Bernie a communist. Trump can demonize an opponent faster than any politician I've seen in my career," said Greg Valliere, veteran political analyst and chief global strategist at AGF. "For most establishment Democrats in the party, they're terrified that if Bernie is at the top of the ticket, they're going to have big losses."

However, Valliere said the market isn't necessarily all-in on Trump and actually would entertain alternatives — just not one named Bernie Sanders.

"For the markets, there's only three candidates who can win in November — Trump, Biden, who's fairly moderate especially on trade, and Bloomberg. The market could live with those three and those are the only three in my opinion who could win," he said. "If Bernie were the nominee ... I think it would be a pretty easy victory for Trump."

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