• Open an Account
  • ATM / Branch
Citi logo Citi logo
  • Overview
  • Market Commentary
  • Financial Guidance
  • Global Perspectives
  • Wharton Knowledge
  • Election 2020
  • Call Financial Advisor: 9am–7pm ET (M–F)
    1-877-357-3399
  • TTY: 1-800-788-6775
  • Sign on to Schedule Appointment
    • Sign On to Citi Personal Wealth Management
    • Banking
    • Credit Cards
    • Investing
    • Lending
    • Citigold®
    • Citigold® Private Client

Citi Personal Wealth Management

All Eyes on Washington

Market Reaction: October 1, 2018

Highlights

Global equities finished the week slightly lower. However, on a quarterly basis, U.S. equity markets posted solid gains with the S&P 500 up 7.2%. The Dow Jones rallied 9.0% during the quarter as trade fears eased. Emerging market shares were the laggard – finishing the quarter 1.1% lower. The 10-year U.S. Treasury yield finished the week unchanged at 3.06%.

With trade tensions starting to ease a bit, investors will likely shift their attention to the upcoming U.S. mid-term elections. The odds appear to favor the Democrats in the House and the Republicans in the Senate. The base case scenario seems to be a Democrat-led House and a Republican-led Senate. However, analysts have clearly gotten it wrong before.

Gridlock in Washington is nothing new and equity markets have traditionally rallied post mid-term elections (regardless of the result). Though knee-jerk reactions to the downside remain a possibility.

Shawn Snyder
Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

All Eyes on Washington

With the U.S. mid-term elections on November 6th quickly approaching, all eyes will be on Washington (as if they weren’t already). Just like many other people, we secretly like to talk about politics, but this medium does not grant us the leisure of doing it in hushed tones. However, given that the U.S. mid-term elections could impact financial markets, we feel obligated to share some thoughts (most of which will be limited to potential outcomes).

The President’s party tends to lose Congressional seats in mid-term elections

We believe that there are four scenarios that could play out (Republicans could expand their majority, simply maintain control, lose the House to the Democrats, or lose both the House and the Senate to the Democrats). In terms of the first scenario, it seems unlikely that Republicans will expand their majority based on historical examples. If we look at mid-terms dating back to 1910, the President's party has lost 31 seats in the House on average. However, if we look at more recent elections, the average loss shrinks. Since 1950, the loss has averaged 24 seats and since the mid-1980s, the average loss has been 20 seats. In this mid-term election, Democrats need to flip 23 seats to take control of the House. Clearly, in the realm of possibility.

Republicans have a more favorable landscape in the Senate

On the Senate side, the President's party has averaged a loss of 4 seats. However, in this mid-term, the odds favor the Republicans as Democrats need to defend 26 seats while Republicans have to defend just 9 seats. On top of this, 10 of the Democratic seats are in states that President Trump carried in the 2016 election. Again, there’s no guarantee and this is not an endorsement of any particular party, but the odds appear to favor the Democrats in the House and the Republicans in the Senate.

A divided Congress seems possible

Given this landscape, a base case scenario would appear to be a Democrat-led House and a Republican-led Senate. If this were to occur (we emphasize if), a divided Congress would likely mean a higher chance of Washington gridlock. Almost any legislation would require compromise from both sides. We do not see this as necessarily negative for equity markets as there have been plenty of examples when the both the U.S. economy and equity markets have excelled under the umbrella of a divided Congress. We do think that there’s some chance that a divided Congress could agree upon an infrastructure spending bill, but with Federal deficits projected to increase, it’s not clear how much momentum such a bill could get (see Figure 1).

Figure 1: U.S. Unemployment Rate vs. Federal Budget Balance (% of GDP)
Figure 1: U.S. Unemployment Rate vs. Federal Budget Balance (% of GDP)
This chart shows the U.S. unemployment rate vs. the Federal Budget Balance (% of GDP). Data shown indicates that in the past the Federal deficit and the unemployment rate have generally followed trends similar to each other. However recent trends and future estimates show the deficit is expected to continue rising while the unemployment rate continues falling.
Sources:
Haver Analytics and Citi Personal Wealth Management as of September 2018. Note: CBO budget projections are based on estimates of what the budget would be under current policies. "Baseline“ projections assume no changes are made to laws already enacted. All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market, and other factors. There can be no assurance that these market conditions will remain in the future.

Further tax reforms seem possible if Republicans maintain control

Currently, the House is talking about Tax Reform 2.0, which would make the individual and small business tax cuts included in the Tax Cut and Jobs Act permanent. If the Republicans are able to hold both the House and Senate, then there’s a greater chance of that happening, but the GOP may be forced to use the budget reconciliation process to do so. If passed, we could envision a scenario where risk assets respond positively. A Republican Congress may also consider indexing capital gains for inflation or making additional changes to the laws such as Dodd-Frank.

Trade policy is largely governed by the Executive branch

In terms of market-moving policy, the legislative side is probably less important than the executive side of things. Importantly, de-regulation and trade policy still fall under the President’s jurisdiction, so that’s not likely to change. In theory, it’s possible that Congress could seek to reign in President Trump’s authority on trade, but the odds of that happening are probably low with Senate Majority Leader Mitch McConnell recently stating, “I think the honest answer is legislation (to limit trade authority) probably would not be achievable even if it were desirable.” We should also point out that in the case of a Democratic sweep of both chambers, that President Trump still has veto power and Democrats would likely not have enough votes to overcome such a roadblock (leaving Congress in gridlock).

Assuming that the base case does happen (the House goes to Democrats, Senate stays Republican), it doesn’t seem like markets will react too strongly. If we look back at mid-terms dating back to 1990, the S&P 500 usually sells-off a bit heading into the elections with Defensive sectors outperforming and then the market tends to rally in the six months following with an average return of about 12% (see Figure 2). That type of return seems excessive given that we are in the ninth year of an economic expansion, but both Brexit and the 2016 U.S. Presidential election certainly displayed similar patterns (see Figure 3).

Figure 2: S&P 500 Performance Around U.S. Mid-Term Elections (Since 1990)
Figure 2: S&P 500 Performance Around U.S. Mid-Term Elections (Since 1990)
This chart shows the S&P performance around U.S. mid-term elections (since 1990). S&P 500 was -1.1% six months before the mid-term and 12.3% six months after. "Defensives" were 4.4% six months before the mid-term and 8.2% after. "Cyclicals" were -3.8% six months before the mid-term and 15.1% after.
Sources:
Bloomberg and Citi Personal Wealth Management as of September 24, 2018. Note: “Defensives” include Consumer Staples, Healthcare, Telecommunications, and Utilities. “Cyclicals” include Consumer Discretionary, Energy, Financials, Industrials, Information Technology, and Materials. Past performance does not guarantee future results.

Past geo-political events have not had a lasting impact

Figure 3: S&P 500 Performance During Brexit and the 2016 U.S. Presidential Election
Figure 3: S&P 500 Performance During Brexit and the 2016 U.S. Presidential Election
This chart shows the S&P 500 performance during Brexit and the 2016 U.S. Presidential Election. Six months prior to Brexit performance initially dropped and then rose with another brief drop in the period immediately surrounding the event; rising to an overall performance increase six months after. Performance followed a similar trend during the six months prior to and following the 2016 U.S. Presidential Election, including a similar brief drop in the period surrounding the event, and also rose to a net performance increase six months after the event.
Sources:
Haver Analytics and Citi Personal Wealth Management as of September 24, 2018. Past performance does not guarantee future results.

Shawn Snyder
Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Featured Posts

  • 2020 is Finally Over
  • Market Outlook 2021: A New Beginning - Investing in a Post-COVID World
  • A November to Remember
  • More Trick Than Treat in October

Latest Webcast

man climbing stairs looking out onto misty morning forest

2021 Outlook - A New Beginning: Investing in a Post-COVID World
Date: Thursday, January 21, 2021
Time: 12:00 PM – 1:00 PM EST
Register Now on 2021 Outlook - A New Beginning: <br class="md-max-none lg-min-block">Investing in a <span class="nowrap">Post-COVID World</span>

See More Content

Use the filters below to see more market commentary, useful webcasts and financial guidance content.

articles found

Video of Shawn Snyder discussing the election and potential policy implications

Washington Watch: The Potential Impact of the Election

Shawn Snyder, Head of Investment Strategy, Citi Personal Wealth Management, and Bill Rys, Managing Director of Federal Government Affairs, Citigroup, share their thoughts on what the results of the U.S. election mean for financial markets, the economy, and your personal finances.

Video (57:00)

Video of Shawn Snyder discussing the election and potential policy implications

Washington Watch: The Path to the Presidency Webcast

Shawn Snyder, Head of Investment Strategy, Citi Personal Wealth Management, and Bill Rys, Managing Director of Federal Government Affairs, Citigroup, share their thoughts on the potential policy implications.

Video (68:00)

Video of Shawn Snyder discussing how to invest in this new economic cycle

Mid-Year Outlook 2020 Webcast

Shawn Snyder, Head of Investment Strategy, Citi Personal Wealth Management, discusses how to invest in this new economic cycle with Steven Wieting, Citi Private Bank’s Chief Investment Strategist and Chief Economist.

Video (59.19)

Explore Citi Benefits

Market Insights are only one of the many benefits you get as a client.

Item 1 through 3 of 6
  • someone touching a tablet with their finger

    Personalized Financial Guidance

    Collaborate with your dedicated team to create a personalized financial plan around your life’s “what ifs” using Citi Wealth Advisor, Citi Personal Wealth Management’s digital financial planning solution.

    Learn More on Personalized Financial Guidance

  • man and woman on couch looking at tablet

    Ways to Invest

    Citi offers a range of investment and insurance products and services that can help you work toward your financial goals. These products include individual stocks, fixed income and mutual funds, as well as more sophisticated offerings like alternative investments and structured products.

    Learn More on Ways to Invest

  • screenshot of mobile phone displaying charts

    World-class Investment Capabilities

    Gain access to Citi Personal Wealth Management’s world-class investment platform, including a breadth of product choices and research from hundreds of analysts globally.

    Learn More on World-class Investment Capabilities

Contact Us


Find a Citi Personal Wealth Management
Financial Advisor

Call: 1-877-357-3399 | 9am – 7pm ET (M–F)

Investment Services: 8am – 9pm ET (M–F) | 9am – 7pm ET (Sat)

Locate an Advisor

Contact your Dedicated Team

Call: 1-800-321-2484 | TTY 1-800-788-6775
or Sign on to schedule an appointment.

Logo: Citi - Welcome what's next
INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED • NOT A BANK DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE • MAY LOSE VALUE

Important Information for You to Know About Our Business and Relationship With You

We are required to deliver two important disclosure documents about our business and relationship with you:

  • Form Client Relationship Summary ("Form CRS") is a brief summary of the brokerage and advisory services we offer.
  • Regulation Best Interest Disclosure Statement is a more detailed description of the brokerage services we offer and our obligations under Regulation Best Interest when we make recommendations to you as your broker-dealer.

Please review both of these important documents online at http://www.citi.com/investorinfo/. If you prefer paper copies, please contact your advisor or call us at (800) 846-5200. TTY 1-800-788-6775.

Citi logo

Important Information

The MSCI ACWI (All Country World Index) captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. With 2,483 constituents, the index covers approximately 85% of the global investable equity opportunity set.

S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index.

Dow Jones Industrial Average is a price-weighted index of the 30 “blue-chip” stocks and serves as a measure of the U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. An investment cannot be made directly in a market index.

The Nasdaq composite index is a market-capitalization weighted index of more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.

The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. With 444constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

The MSCI Japan Index is designed to measure the performance of the large and mid-cap segments of the Japanese market. With 320 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan.

The MSCI Emerging Markets Index reflects performance of large and mid-cap stocks in roughly 20 emerging markets.

The Citi World Broad Investment Grade Bond index is weighted by market capitalization and includes fixed rate Treasury, government sponsored, mortgage, asset backed, and investment grade (BBB–/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of $1 billion for Treasuries, $5 billion for mortgages, and $200 million for credit, asset-backed and government- sponsored issues.

The Citi U.S. Broad Investment-Grade Bond Index (USBIG) tracks the performance of US Dollar-denominated bonds issued in the US investment-grade bond market. Introduced in 1985, the index includes US Treasury, government sponsored, collateralized, and corporate debt providing a reliable representation of the US investment-grade bond market. Sub-indices are available in any combination of asset class, maturity, and rating.

The Euro Broad Investment-Grade Bond Index (EuroBIG) is a multi-asset benchmark for investment-grade, Euro-denominated fixed income bonds. Introduced in 1999, the EuroBIG includes government, government-sponsored, collateralized, and corporate debt. Sub- indices are available in any combination of asset class, maturity, and rating.

The Citi Emerging Market Sovereign Bond Index (ESBI) includes Brady bonds and US dollar-denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Africa, Asia, Europe and Latin America. We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded.

The US High-Yield Market Index is a US Dollar-denominated index which measures the performance of high-yield debt issued by corporations domiciled in the US or Canada. Recognized as a broad measure of the North American high-yield market, the index includes cash-pay, deferred-interest securities, and debt issued under Rule 144A in unregistered form. Sub-indices are available in any combination of industry sector, maturity, and rating.

The Weekly Market Update report should not be considered a recommendation or research report. Nor should it be considered a solicitation, advice or a recommendation with respect to any investment strategy, asset allocation or particular investment. The Weekly Market Update is not intended to constitute “research,” as that term is defined by applicable regulations. The views expressed herein are those of the author and do not necessarily reflect the views of Citigroup Global Markets Inc. or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

There may be additional risk associated with international investing, including foreign, economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes, and differences in financial and accounting standards. These risks may be magnified in emerging markets. International investing may not be for everyone.

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.

The market and planning commentary on this site may discuss topics that are timely to current events at the time they were written or filmed. The relevance of such topics may change at future dates.

Investments are subject to market fluctuation, investment risk, and possible loss of principal.

Diversification and asset allocation do not protect against loss or guarantee a profit. Past performance is no guarantee of future results.

Please consult your Financial Advisor before making any investment decisions.

Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

The information set forth was obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness.

These strategies do not necessarily represent the experience of other clients, nor do they indicate future performance or success. Investment results may vary. The investment strategies presented are not appropriate for every investor. Individual clients should review with their advisor the terms and conditions and risk involved with specific products or services.

The products and services mentioned in this communication are not offered to individuals’ resident in the European Union, European Economic Area, Switzerland, Guernsey, Jersey, Monaco, San Marino, Vatican and The Isle of Man. Your eligibility for a particular product and service is subject to a final determination by us. This communication is not, and should not be construed as, an offer, invitation or solicitation to buy or sell any of the products and services mentioned herein to such individuals.

U.S. Wealth Management includes Citi Personal Wealth Management, Citi Priority, Citigold® and Citigold® Private Client.

Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. (”CGMI”), member SIPC. Citigroup Life Agency LLC (“CLA”) offers insurance products. In California, CLA does business as Citigroup Life Insurance Agency, LLC (license number 0G56746). Citibank, CGMI, and CLA are affiliated companies under the common control of Citigroup Inc.

©2021 Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world.

Privacy | Notice at Collection | CA Privacy Hub