Historically, small-cap stocks have outperformed larger-cap stocks after presidential elections, and as November’s results provide more certainty for investors, professionals say a turning point for small companies could be looming ahead. horizon in 2025.
Looking at investment performance trends over the past three decades, American Century Investments Vice President Mike Rode said the small-cap Russell 2000 Index has typically generated returns above 23 per cent. hundred after a presidential election.
In contrast, the Russell 1000 Index – which tracks the top 1,000 stocks – returned about 18% during the same period.
“Commentators may like drama, but businesses and markets don’t like uncertainty. This could be one reason why markets are typically volatile before elections and tend to perform better after midterms and presidential elections,” Rode said.
“Even though investors may look to the perceived safety of larger, more established companies amid political uncertainty, they may be more willing to take risks once the election is settled,” Rode said.
He advised investors to “expect the unexpected” in a presidential election year, suggesting that maintaining a steady course is often the best strategy.
“If history rhymes, we think markets could see some relief after a post-election rally with small caps poised to lead the way,” the investment chief said.
In a recent market note, Francis Gannon, co-chief investment officer at small-cap specialist Royce Investment Partners, also observed that U.S. small-caps historically shine in presidential election years.
Typically, outside of crises or major global events, political developments and stock market fluctuations do not coincide with significant volatility, he noted.
However, Gannon pointed out that the 2024 election year in the United States has been particularly “remarkable” for its unpredictability, marked by unprecedented events such as assassination attempts, the resignation of a sitting president, the entry of a new candidate into the race and changes in the polls.
Additionally, the stock market has seen its own fluctuations, including a brief shift toward small-cap stocks in July as mega-cap stocks declined, followed by a selloff in early August.
“Even though U.S. markets have begun to stabilize, much remains uncertain about the future,” Gannon said.
Still, this combination of market moves could signal upcoming leadership for small caps, he said.
“History rarely repeats itself, but the persistence of the small-cap Russell 2000 Index’s advantage over its large-cap sibling, the Russell 1000 Index, is, in our view, quite striking,” he said. Gannon said.
“So while recent political and stock market events offer lessons in the importance of patience and caution, we hope that small-cap investors will find something to cheer about, regardless of which direction the election takes. “
