How to Trade the US Election

As the 2024 U.S. election year approaches, financial analysts at Citi research are closely examining historical trends and potential market dynamics that could shape the investment landscape.

Election years have historically been robust for U.S. equities, and the current scenario, featuring only a Democratic incumbent and a Republican challenger, adds an interesting layer to the market outlook.

Typically, the two months leading up to elections witness a pullback and consolidation in the markets. However, this trend is often unwound in the week preceding and following the election, offering opportunities for investors. Fixed income, particularly U.S. Treasuries (UST), tends to face challenges into and out of elections resulting in a unified government, where the President's party controls Congress. The likelihood of a divided government in 2024 is seen as a positive factor for markets.

Should Republicans emerge victorious, analysts draw parallels to the 2016 market landscape. This scenario could bring about stronger risky assets, a steeper UST curve, and a more robust U.S. Dollar. Interestingly, the potential impact on the Mexican Peso (MXN) and defensive sector movements may be less pronounced this time around.

At the sector level, banks are expected to perform well, while the technology sector may face vulnerability due to bipartisan desires for increased regulation. Historical data indicates that equities generally perform strongly in election years, particularly when the incumbent is running. However, the short-term preference leans towards Republican challengers over Democratic counterparts.

Incumbent victories are broadly viewed as equity-friendly, but the market tends to favor Republicans in the short term. Historical losses by incumbents in 1976, 1980, 1992, and 2020 were associated with declines in equities. Additionally, fixed income underperforms in the wake of Republican challenger victories, followed by a subsequent rally.

A preference for divided government emerges as a notable trend. Fixed income tends to underperform into and out of elections that result in a unified government. In contrast, equities trade more favorably in elections leading to a divided government, and any underperformance during unified governments is typically reversed after the election.

The strength of the U.S. Dollar is anticipated to be influenced by the election outcome. Republican challenger victories historically correlate with a stronger USD, not only against major currencies but also against the Mexican Peso (MXN) and Chinese Yuan (CNY). Financial sectors are expected to outperform the technology sector, with aerospace and defense performing well before and after elections where Republicans emerge victorious. Oil and gas may experience a small rally followed by a reversal, while healthcare performance tends to vary based on the party in power.

Looking ahead to 2024, analysts suggest that a Republican win could lead to market dynamics reminiscent of 2016, marked by higher equities, credit, rates, and a stronger USD. External factors, such as the ongoing situation in Ukraine, may introduce additional uncertainties, prompting investors to closely monitor any shifts in the election landscape for timely price action.

By Michael Elkins | [email protected]

You May Also Be Interested In