How Presidential Elections Can Influence Small-Cap Stock Performance
Research shows that small-caps have historically outperformed large-caps the year after a presidential race.
Key Takeaways
Historic, unpredictable events have roiled the 2024 presidential campaign. The only certainty has been uncertainty in the markets.
Markets have tended to perform better after major elections, with small-caps historically outperforming following presidential contests.
We believe that election outcomes bring clarity, which is generally favorable for the markets.
A history-changing presidential debate. An assassination attempt. A president abandoning his pursuit of a second term. An ’80s wrestling star tearing off his shirt at the podium during a party convention.
Unexpected events during the 2024 presidential campaign have unleashed a flood of uncertainty, and additional shocks to the U.S. political system could await before November 5.
Historical Performance of Small-Cap Stocks Around Elections
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.
As shown in Figure 1, small-cap companies (Russell 2000® Index), in particular, have tended to outperform their large-cap counterparts (Russell 1000® Index) in the year following a presidential election.
Figure 1 | With Recent History on Their Side, Small-Caps Have Tended to Lead the Way After Presidential Elections
Data from 11/4/1990 – 11/8/2023. Source: FactSet. Past performance is no guarantee of future results.
Factors Contributing to Small-Cap Outperformance Post-Election
There could be varied reasons for small-caps historically outperforming after a presidential contest, and much of it could depend on the circumstances during 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.
Election results can shake off some of this uncertainty because investors know who will set the country's agenda, and the party breakdown in Congress can offer clues about the president’s ability to implement that agenda.
So, in our view, investors should expect the unexpected. But if history rhymes, we think markets could see relief from a post-election rally with small-caps poised to lead the way.
Authors
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Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.