Citi: Election trading cools down, recession worries intensify, danger looms for US stocks in the second half of the year

As Biden withdraws from the race, the Democratic Party quickly unites to support Harris as the new presidential candidate, causing a decrease in Trump's chances of winning, and the "election trade" temporarily fades away.

Citi points out that the market is shifting its focus from politics to economic fundamentals. Concerningly, a series of recently released data is sparking market fears of an economic recession, which could pose withdrawal risks for US stocks in the second half of the year.

Election Trade Cools Down! May Return After September

On Thursday local time, analysts like Dirk Willer from Citi released a report stating that the market may have seen the ceiling of Trump's support rate in the polls, and the "Trump trade" is fading away.

Nevertheless, some "Trump trades," such as the steepening of the yield curve and the rise in bank stocks, show more resilience due to fundamental support.

Citi states that the "election trade" will temporarily come to a halt but will not completely disappear, with expectations of a return later, possibly after the Fed's September interest rate decision.

Most of Wall Street expects the Fed to cut interest rates for the first time this year in September, making the election the biggest factor affecting the US economy and capital markets. Additionally, the election itself carries enough risk premium, and the policy frameworks of the two candidates have significant differences.

Citi also points out that certain industries, such as energy, apparel (potentially affected by tax policies), and the solar industry, may be impacted by changes in the probability of a Trump victory. As the market reassesses the prospects of these industries, some investors may adjust their trading strategies.

Recession Concerns Intensify, US Stocks May Face Pullback

Signs of a global economic slowdown are becoming more apparent, with soft manufacturing PMI data in the US and Eurozone, and a further decline in the copper/gold ratio.

Citi also believes that the Sam rule, which predicts a recession based on the unemployment rate, may be triggered in September, further intensifying market concerns about an economic recession.

While US GDP grew better than expected in the second quarter, consumption remained robust, and so far, most investors still believe in the narrative of a "soft landing." However, Citi believes that once US stocks reverse their upward trend, credit market deterioration may lead investors to start worrying about an increased risk of an economic "hard landing."

Citi's POLL index indicates that US stocks may face pullback risks in the second half of the year, especially amid the current uncertainty of the earnings season, making it not easy to capture a market decline.

The POLL index measures market concerns about future growth. Based on historical experience, when the POLL index reaches 16, the performance of the S&P 500 index in the near future tends to be disappointing On July 12th local time, the POLL indicator triggered this warning level. According to the POLL indicator, the median performance indicates a possible 5% pullback in the US stock market in the second half of the year.

After experiencing turbulence over the past two weeks, half of this estimated decline has already been realized. Since July 12th, the cumulative decline of the S&P 500 index has reached 2.8%.

Citi also pointed out that with global data softening, the US dollar may continue to benefit, and it is expected that the Bank of England will cut interest rates at the August meeting, putting pressure on the British pound against the US dollar