U.S. Elections and Market Trends

As the U.S. election approaches, Citi analysts observe that markets are breaking from traditional patterns seen in previous election cycles, highlighting the influence of macroeconomic indicators and corporate earnings over election-related factors.

Historically, U.S. equities experience a downturn in the month leading up to an election, accompanied by increased volatility. However, this October has seen a rally in equities and a lower VIX, suggesting that broader economic factors are more significant this year.

Citi states, “U.S. equities are typically weaker in the one-month lead up to the election, but equity markets have been relatively strong this October.”

In contrast to the usual defensive shift to Quality stocks, Growth and Price Momentum have shown better performance, indicating a lack of style de-risking, as noted by Citi.

Similarly, Morgan Stanley remarked that immediate market reactions to election outcomes might not accurately forecast long-term trends. They advise investors to consider the distinction between “what’s in the price” and the “plausible policy path,” given that short-term fluctuations can be misleading.

Citi's analysis anticipates potential post-election trends, suggesting that U.S. equities could see positive performance once election uncertainty fades. They remark, “U.S. equities tend to perform positively (if not rally) post the election,” with current S&P 500 positioning indicating expectations for further gains.

However, they caution that rising interest rates could pose challenges to this outlook, as increased bond yields may put downward pressure on stocks. In recent months, market dynamics have been more heavily influenced by macroeconomic events rather than political factors, with Citi asserting that “other risks, such as U.S. macro, reporting season etc., are having a bigger influence than any perceived election risks.”