Stocks rose after LBJ’s surprise announcement, but the market had already priced in Biden’s withdrawal
There are superficial similarities but many differences between Joe Biden and Lyndon Johnson’s situations.
No one knows how the U.S. stock market will react now that President Joe Biden has withdrawn from the 2024 presidential race. The only historical parallel is to former President Lyndon B. Johnson’s decision to withdraw from the 1968 presidential race, and the differences between then and now outweigh any analogy.
Superficially, this historical parallel bodes well for stocks. LBJ withdrew from the 1968 race on Sunday, March 31, 1968; the next day the S&P 500 closed 2.5% higher. Furthermore, Johnson’s withdrawal came near the low point for the U.S. market in 1968; by the end of the year the S&P 500 was 15.1% higher.
A widely anticipated event will already be reflected in stock prices.
Below the surface, however, there are numerous differences between 1968 and now that make it unlikely the market would react in the same way as it did then:
Unlike the situation today, LBJ’s withdrawal was a big surprise, according to Max Holland, an historian who is the author, editor or co-author of six books largely focused on the 1960s. In an interview last week, before Biden made his announcement, Holland said that “despite some superficial parallels between LBJ’s withdrawal in 1968 and Joe Biden’s potential withdrawal from this year’s presidential race, there are profound differences. LBJ’s withdrawal took most people outside of a small inner circle by surprise; it was not widely speculated about in public or expected. By contrast, today the clamor for Biden to cease his campaign is being conducted openly.”
Holland’s point is relevant because a core feature of efficient markets is that a widely anticipated event will already be reflected in stock prices and, because of that, the market will have little additional reaction if and when that event comes to pass. So even if you could credit LBJ’s announcement as the source of the S&P 500’s big positive reaction, you couldn’t conclude that the market would react in the same way today.
It would be unfair to view LBJ’s withdrawal as the sole source of the market’s positive reaction. At the same time as he announced his withdrawal, Johnson also announced a partial cessation of U.S. bombing of North Vietnam — a policy that had been widely unpopular among many in the U.S. and the source of deep societal divisions. It is impossible to separate the impact of that announcement from LBJ’s decision to withdraw.
Another difference between 1968 and now has to do with stock market sentiment. I base this assertion on Investors Intelligence’s Sentiment Index, which is the only sentiment measure I know of that dates back to the 1960s. The latest reading of that index prior to LBJ’s announcement was that just 10.3% of monitored market-timers were bullish — an extremely low percentage. According to contrarian analysis, widespread bearishness is a bullish sign, so it’s possible to attribute the stock market’s strong performance in the wake of LBJ’s announcement to this contrarian reaction.
Today, however, bullish sentiment is at or close to all-time highs, according to my firm’s monitoring of stock-market timers. In contrast to when LBJ withdrew in 1968, current stock-market sentiment constitutes stiff headwinds for the market going forward — blunting any positive reaction the market might otherwise have to Biden’s withdrawal.
The bottom line? Wall Street analysts love to quote Mark Twain’s famous line that even though history doesn’t repeat itself, it often rhymes. But in comparing LBJ to Biden in this case, there’s not much history with which the market could rhyme.
