It doesn’t have to be scary to vote in the U.S. Citi says this is the right way to trade it based on history.

You can feel the stress. In the next five trading days, there will be an election, the monthly report on nonfarm payrolls in the U.S., and a vote on Federal Reserve policy. Money people are also wary of how much some huge tech companies are worth.

The worry was clear in the S&P 500 SPX’s 1.9% drop on Thursday, which ended a five-month winning streak for the main stock index. The CBOE VIX VIX, which shows how volatile the stock market is predicted to be, is 22.5, which is higher than the front-month VIX future, which is 20.6.

“The VIX term structure is upside down and will stay upside down until after the election…”Tom Lee, head of research at Fundstrat, says, “This means markets expect bigger changes in volatility in the near future.”

Even with all this stress, Dirk Willer and his team of analysts at Citi think the S&P 500 index will do well through the end of the year.

Some of what they call “Trump trades”—beating on higher inflation over the next 5 years and investing less in U.S. stocks and more in European ones—have paid off. This is because they think the “risk-reward has deteriorated” since the election is still too close to call.

However, seasonal factors still support stocks of course, says Citi: “Years that have seen large returns in the S&P 500 from January – October have typically been followed by strong November-December returns. This is also true when there are elections. So far in 2024, the S&P 500 is up 19.6%.

The Citi team also thinks that the election won’t have much of an effect in the next few years. First, if Donald Trump won the election again, the stock market would not worry about his plans to put taxes on imports because they would see them as a way to negotiate and would not be put into action right away.

“Second, as we’ve said before, we don’t think a Harris win would be bad for equity if she doesn’t take the Senate.””Any drop related to Harris might not last long,” says Citi.

Citi says that when standard Treasury yields go up by 30 to 40 basis points every month, the S&P 500 returns on average go up, but when they go up by 40 to 50 basis points, the returns on stocks go down. “This would suggest that a 10-year yield in the 4.50% to 4.70% range may still be consistent with a year-end [stock] rally, though much higher rates may not be,” says Citi.

Citi also says that its variable risk premium has been set off. This happens when there is a difference of more than two standard deviations between implied and actual volatility. The chart below shows how this can be used as a warning sign.

Citi says that there is a good reason for more doubt before the U.S. election, but the market is acting “overly fearful” and is ready to jump on a good election outcome.

But what about making short-term guesses about the election? Citi looked at what would have happened to a number of assets over 5, 10, and 22 days if an investor had followed the trend after Tuesday’s vote. This means that if an object went up on Wednesday, the trader would buy it on Thursday. If it went down, they would sell it.

Citi thinks that the S&P 500 is the best asset to chase after the election because it has the most momentum. Citi says, “The results are amazing. Even if you don’t count 2008 (when the strategy would have correctly sold SPX), historically chasing momentum for 5 days after the election would have produced an active information ratio of 6.” The AIR is a measure of how well an investment is doing by comparing its active return to its active risk. A bigger number means the investment is doing better.

“This is worryingly high, so to make sure the signal is strong, we test it across multiple lags and find that for short holding periods, this is still a very good trading strategy.” Citi says, “That’s why we’re going to look for chances to tactically chase SPX after the price action next Wednesday.”

Shopping

At the start of the day, U.S. stock indices SPX and DJIA COMP are up, while benchmark Treasury yields BX:TMUBMUSD10Y are down after the weak jobs report. The dollar index (DXY) is going down, the price of oil (CL.1) is going up, and the price of gold (GC00) is around $2,757 an ounce.