Citigroup: What the market is most concerned about is not the election; U.S. stocks are likely to hit new highs again

Citigroup analysts stated that elections often have a significant impact on market trends before voting, but traders this year seem to be more focused on other matters.

Analysts pointed out that several market indicators that typically flash before U.S. elections are noticeably calm this year, suggesting that concerns about the election's impact on the market may be less than in previous years.

They believe that traders are not focused on the election, but rather on the U.S. economy and earnings season.

In a report on Monday, Citigroup analysts said, "The performance of the stock market before the U.S. election is inconsistent with previous elections. Overall, this indicates that other risks, such as the U.S. macroeconomy and earnings season, have a greater impact than any perceivable election risk."

Analysts noted that U.S. stocks have continued to rise in the months leading up to the election. Typically, investors would withdraw from the stock market before the election, resulting in negative market performance in the month prior to the election.

The S&P 500 index fell 0.3% last month, but it has risen 10.7% over the past six months, demonstrating a sustained strong bull market. Analysts stated that the strong performance of U.S. stocks in the weeks leading up to the election may be driven more by the robust state of the U.S. economy rather than investors building positions in the "Trump trade" or "Harris trade."

"Compared to the past, U.S. stocks have been very strong entering this election cycle," analysts said. "The current anomaly is less related to the market pricing of election outcomes and more related to expectations of continued rate cuts by the Federal Reserve and a potentially moderate slowdown in the U.S. economy."

The Federal Reserve began its easing cycle in September and is expected to continue cutting rates by 25 basis points at the upcoming meeting. Meanwhile, economists increasingly anticipate a "soft landing" for the U.S. economy, avoiding a sharp recession while inflation continues to decline slightly.

The relatively low volatility index is another sign of the limited impact of the U.S. election, indicating that the market may not place much importance on the election results. Analysts noted that it is rare for the volatility index to be low in an election year.

"Increased uncertainty should translate into higher expectations for volatility. Nevertheless, with the stock market hitting new highs and the VIX index at a low level, this indicates that investors are not overly concerned about the election results," they said.

However, analysts indicated that, as in previous years, the stock market is likely to rebound after the election. They stated that due to the robust performance reported by most companies in the latest earnings season, the current market positioning makes it very likely that the stock market will rebound after the voting on November 5 and may climb to new highs in the new year