Due to uncertainties surrounding important events such as the U.S. monthly non-farm payroll report, the U.S. presidential election, and the Federal Reserve's policy decisions, investors feel a tense atmosphere. Moreover, investors are also concerned about the valuations of certain large tech companies.

This anxiety is evident in the 1.9% drop of the S&P 500 index (SPX) on Thursday, which ended the index's five-month rising trend. At the same time, the volatility index (VIX) was at 22.5, higher than last month's VIX futures price of 20.6, which is an indicator of expected stock market volatility.

Fundstrat research director Tom Lee stated: "The VIX term structure is inverted, and the VIX futures price remains inverted on election day, indicating that the market expects greater volatility in the short term."

Despite all these concerns, the Citi bank strategist team led by Dirk Willer believes that the S&P 500 index looks promising by the end of the year.

They have already taken profits in some so-called Trump trades—such as holding 5-year breakeven inflation rates (betting on rising inflation) and shorting European stocks—believing that, given the unpredictability of the election results, "the risk-reward ratio has deteriorated."

However, Citi noted that seasonal factors still support U.S. stocks: "In years when the S&P 500 index rises significantly from January to October, the index usually accompanies strong returns in November and December. This pattern also applies in election years." So far in 2024, the S&P 500 index has risen by 19.6%.

The Citi team also believes that the election has little impact in the medium to long term. First, if Trump returns to the White House, the stock market will ignore concerns about his proposed tariffs on imported goods, as this would be seen as a negotiation strategy and would not be implemented immediately.

Citi stated: "Secondly, as we have written before, we believe that if the Democrats do not win the Senate, Harris's victory will not have a significant negative impact on the stock market, and any decline related to Harris may be relatively short-lived."

Regarding interest rates, Citi pointed out that when the benchmark U.S. Treasury yield rises by 30 to 40 basis points per month, the median return of the S&P 500 index is positive; when the benchmark U.S. Treasury yield rises by 40 to 50 basis points per month, the median return of the S&P 500 index is negative. "This means that if the 10-year U.S. Treasury yield is between 4.50% and 4.70%, it may still align with the potential trend of a stock market rebound by the end of the year."

Additionally, Citi stated that the variance risk premium of U.S. stocks has been triggered. This occurs when the difference between implied volatility and actual volatility exceeds two standard deviations, which can be used as a contrarian indicator.

Citi said: "While the increase in uncertainty before the U.S. elections is justified, the market shows signs of 'excessive fear' and seems ready to rebound if the election results are positive."

But what about ultra-short-term election speculation? Citi backtested the performance of various assets over 5 days, 10 days, and 22 days after the vote.

Citi's most favored trend trading target after the election is the S&P 500 index.

Citi concluded: "We find that this is still a very effective trading strategy for short-term holding periods. Therefore, we plan to look for opportunities to tactically chase the trend of the S&P 500 index next Wednesday."

Article reposted from: Jinshi Data