Citigroup has identified the market rhythm surrounding the U.S. midterm elections. In the 50 trading days leading up to the election, investors are expected to reduce their positions due to policy uncertainty, putting pressure on three asset classes simultaneously; however, in the 30 trading days before the election, the stock market may rebound first.
Source: Jin10 Data
With less than three months until the U.S. midterm elections, investors are reassessing the potential market impacts of various political outcomes. Citigroup's strategy team has developed a trading framework based on the post-election government landscape, suggesting that if the Republican Party loses its current comprehensive control of Congress and the White House, the bond market may see an opportunity for gains.
The U.S. midterm elections will be held on November 3, local time, where voters will elect members of the House of Representatives and the Senate. Currently, the Republican Party controls the House, the Senate, and the White House, creating a "triple control" situation.
Data from the prediction market Polymarket shows that market participants believe there is a 48% chance that the Democratic Party will win both chambers of Congress; another 38% of participants expect the Democrats to take the House while the Republicans maintain control of the Senate.
However, the data from the prediction market does not equate to official forecasts or election result judgments. The well-known tech magazine WIRED reports that many election officials are concerned that the public may misunderstand the meaning of prediction market odds, viewing them as results similar to polls or official forecasts.
A survey conducted by a large election jurisdiction cooperative organization found that 75% of respondents could not correctly understand what the prediction market odds represent, with 35% believing these numbers represent already counted ballots or official forecasts released by state governments.
The team led by Citigroup strategist Alex Saunders believes that if a situation arises post-midterm elections where the Democratic and Republican parties control different power centers, the bond market may benefit.
"Losing the current government's triple control will weaken fiscal expectations and drive U.S. Treasury bonds up after the election," Citigroup strategists wrote in a recent report.
Citigroup points out that a divided government usually means increased difficulty in advancing new policies, leading to lower market expectations for large-scale fiscal spending, and thus U.S. Treasury yields tend to decline. The yield on 10-year U.S. Treasury bonds typically shows a downward trend in similar situations. Bond prices move inversely to yields.
Currently, the market is focused not only on the election results themselves but also on the potential impacts on future fiscal policy, Federal Reserve policy, and debt issues.
Citigroup states, "A divided government typically results in lower yields and a flattening yield curve," but there are still multiple risk factors in the current environment, including a continuously expanding fiscal deficit, the Federal Reserve's interest rate outlook, and future contentious debt ceiling negotiations.
In addition to the bond market, Citigroup believes the midterm elections will also affect the performance of stocks and credit assets. Compared to years without midterm elections, stocks, credit markets, and interest rate markets typically begin to feel pressure about 50 trading days before the vote, as investors adjust their positions in advance to cope with policy uncertainty.
As the voting day approaches, the market may gradually digest political risks. Citigroup believes that in the 30 trading days before the election, the stock market often experiences a round of relief rally, reversing the volatility caused by uncertainty, which may continue until the end of the year.
The rapid expansion of prediction markets is also changing the way market participants observe elections. WIRED reports that during the 2024 U.S. presidential election, prediction markets attracted significant funding, with a French user earning $80 million by betting on Donald Trump's victory. As the 2026 midterm elections approach, both Polymarket and Kalshi have launched dedicated election trading segments.
However, the expansion of prediction markets has also brought new controversies. Some election officials are concerned that if market odds deviate significantly from the final certified results, it may further exacerbate public doubts about the election results and amplify market volatility.
From an industry perspective, Citigroup believes that if a divided government emerges after the election, cyclical tech stocks and some industrial stocks may become beneficiary sectors, while defensive healthcare stocks and essential consumer goods sectors may lag behind.
For investors, the key is not just to determine which party wins, but to assess whether the election results will change the fiscal policy space, expectations for Treasury supply, and the market's pricing of future interest rate paths. Citigroup's core strategy is that a decentralized government power may lower expectations for fiscal expansion, thereby supporting the bond market; at the same time, an improvement in risk appetite may drive a rebound in some cyclical stocks and tech stocks.
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