What to do next week? Citigroup: Suggest taking profits on the "Trump trade," especially focusing on U.S. stocks and the U.S. dollar after the election

As the U.S. election approaches, global investors are focusing on the fierce competition between Trump and Harris. Considering Trump's chances have weakened and the pricing of the "Trump trade" may have overshot, Citigroup believes it is time to take profits on the "Trump trade" and pay special attention to the trends in U.S. stocks and the dollar after the election.

Earlier this week, Citigroup's analyst team led by Dirk Willer released a research report indicating that the market has partially priced in the possibility of a Trump victory, suggesting that the risk-reward ratio for Trump-related trades has deteriorated. Therefore, Citigroup believes investors should take profits on some Trump-oriented positions, especially those assets related to Trump's policies and improvements in opinion polls. These assets have performed well since the last non-farm payroll report, but Citigroup believes the current risk-reward is no longer attractive.

Citigroup wrote in the report:

The Trump trade performed very strongly in October, also supported by favorable macro tailwinds. At this stage, the risk-reward has deteriorated, and we continue to take profits, now closing our excess performance trade on financial stocks.

First, if Harris is still able to win, given that the polls remain quite close, the market may misprice the outcome. Second, given the actions that have already occurred, the market may have overvalued; third, when predicting the policy actions Trump would take if re-elected, the market may also be misjudging.

The report shows that based on historical data and market behavior analysis, investors who make investment decisions based on market trends after the election results are announced often achieve positive returns, especially in the S&P 500 Index (SPX) and the Dollar Index (DXY).

Citigroup maintains an overweight position on U.S. stocks, particularly in the context of year-end seasonal factors and risk value pricing (VRP) signals being triggered. Citigroup believes that although the market may experience volatility due to tariff issues or rising interest rates, these risks have already been partially priced in by the market.

Are U.S. Bank Stocks Struggling?

Citigroup specifically mentioned the long position in U.S. bank stocks relative to the equal-weighted S&P 500 Index and believes this position should be closed.

The core of this strategy is the expectation that U.S. bank stocks will outperform the average performance of other stocks in the S&P 500 Index, and based on this, investment positions are established to seek relative returns. The institution's research department previously established a similar investment position, which has brought a 1.03% return to Citigroup's global macro strategy portfolio since October 10, 2024.

However, Citigroup now believes that this position should be closed, as the institution thinks the likelihood of Trump winning has been overvalued by the market, and the actual election results remain highly uncertain, with polls showing a very close competition. In this case, Citigroup believes that the risk-reward ratio of continuing to hold this position is no longer attractive.

Focus on U.S. Stocks and the Dollar

Citigroup believes that, although the market's expectations for Trump's victory have been partially reflected in stock prices, U.S. stocks will still perform well before the end of the year. This optimistic expectation is based on two main arguments: first, the implementation of any tariff policy will take time, so it is unlikely to have an immediate negative impact on the market; second, even in the case of a Harris victory, as long as the Senate is not simultaneously controlled, the impact on the stock market will also be limited, as maintaining the status quo is positive for the U.S. stock market.

Despite market concerns that rising interest rates may put pressure on the stock market, Citigroup's analysis shows that a sharp rise in interest rates does not necessarily have a negative impact on the stock market. In a stress scenario, even if the yield on the U.S. 10-year Treasury bond may rise by 30-40 basis points, historical data indicates that such changes do not significantly affect the stock market, and in some cases, stock market returns may even be positive.

Citigroup has found through VRP signals that the market may be tactically oversold, indicating that the market may have overreacted to the uncertainty of the election. They believe that although there is uncertainty in the market before the election, it shows signs of being "too fearful" and may rebound positively if the election results are favorable. Additionally, seasonal factors also support a market rebound before the end of the year, leading Citigroup to maintain an overweight position on U.S. stocks.

As for the dollar, Citigroup believes that the USD/JPY exchange rate will be more influenced by the results of the U.S. election rather than the Japanese elections or changes in the policies of the Bank of Japan