Historically, small-cap stocks have outperformed larger ones after presidential elections, and as November’s results provide more certainty for investors, professionals believe a turning point for smaller companies may be on the horizon in 2025.
Looking at investment performance trends over the last three decades, American Century Investments’ vice-president, Mike Rode, said the small caps Russell 2000 Index has typically delivered returns exceeding 23 per cent following a presidential election.
In contrast, the Russell 1000 Index – tracking the highest-ranking 1,000 stocks – has returned around 18 per cent during the same time period.
“Commentators may thrive on drama, but businesses and markets don’t like uncertainty. This could be one reason that markets are typically volatile before elections and have tended to perform better after midterms and presidential elections,” Rode said.
He added that the outperformance of small-cap stocks may stem from various factors related to each election cycle.
“While investors may gravitate to the perceived safety of larger, more established companies amid political uncertainty, they may be more willing to take on risk once the election is settled,” Rode said.
He advised investors to “expect the unexpected” during a presidential election year, suggesting that maintaining a steady course is often the best strategy.
“If history rhymes, we think markets could see relief from a post-election rally with small-caps poised to lead the way,” the investment executive said.
In a recent market note, Francis Gannon, co-chief investment officer at small-cap specialist Royce Investment Partners, also observed that US 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 highlighted that the 2024 election year in the US has been particularly “notable” for its unpredictability, marked by unprecedented events such as attempted assassinations, a sitting president stepping down, a new candidate entering the race, and shifts in polling.
Additionally, the stock market has experienced its own fluctuations including a brief shift into small-cap stocks in July as mega cap names declined, followed by a significant sell-off in early August.
“While the US markets have begun to stabilise, much remains uncertain going forward,” Gannon said.
Still, this combination of market movements could signal upcoming small-cap leadership, he said.
“History seldom repeats itself – but the persistence of the advantage for the small-cap Russell 2000 Index over its large-cap sibling, the Russell 1000 Index, is, in our view, quite striking,” Gannon said.
“So, while recent events in both politics and the markets offer lessons in the importance of patience and caution, we are hopeful that small-cap investors will find plenty to cheer about regardless of which direction the election takes.”
