Is it too early to trade the US election? Citi weighs in

The first presidential debate is set for this Thursday evening, with the race still being close. Unlike previous election cycles, this time the debate is happening much earlier, which might lead to a less detailed discussion of policies.

According to Citi analysts, any equity market effects caused by the debate are likely to be short-lived.

More broadly, stocks usually price election risk roughly two months prior to the voting day “and we may see some weakness as markets anticipate the looming November event,” analysts noted.

“We think the debate’s policy discussions will be rather surface-level; economy-related discussions will not include fiscal reduction, adding to fragility,” they continued. “Bond markets typically prefer a divided government while equities prefer unified.”

In the context of this year’s election, the likelihood of the US ending up with a divided government in the 2024 election is reasonably high, Citi said in a note. This scenario is particularly plausible if a Democrat wins the presidency, as the party may struggle to maintain control of the Senate.

For the bond market, this would mark the best outcome, given the current high degree of uncertainty in the polls.

Analysts suggest that it would take an unusually poor performance from either candidate to significantly impact November's election. They believe this indicates that the current, somewhat uneasy balance between long-term fiscal deficit concerns and a dovish Federal Reserve will remain intact.

Overall, Citi analysts believe that with the election still being uncertain and far enough, near-term macro catalysts – such as the Federal Reserve's actions, key macroeconomic data, and the upcoming earnings season – will drive markets “prior to moving into the US election trade window later in the summer.”