Small-cap stocks may offer tactical opportunities.
Investors who expect a late-year, post-election rally in small-company stocks may need to be patient.
Historically, December has been the best month for small-cap outperformance, with the Russell 2000 index of small-company shares beating the large-cap S&P 500 index by an average of 1.3% over the last 30 years. Moreover, when Trump won the 2016 Presidential election, small-caps soared 16.3% over the ensuing month (see the chart).
However, small-caps’ return has been far more muted this time around. The chart shows the Russell 2000 is up 6.5% one month out of the election and down from its immediate post-election bump. Also, this month, small caps lag large caps (represented by the S&P 500) by 3.9%.
Small-Cap Stock Performance Post-U.S. Elections
(2016 vs. 2024)
Source: Bloomberg, calculations by Horizon Investments, data as of 12/16/2024. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an index.
What gives? The interest rate environment today versus 2016 is one big factor. Consider that in 2016:
- The yield on the 10-year U.S. Treasury was 1.83% versus 4.28% today. Since smaller companies tend to rely more heavily on debt, higher rates can cramp their perceived growth prospects.
- The spread between the 10-year Treasury yield and the 2-year Treasury yield significantly widened after the election. A steepening yield curve often indicates improved economic growth expectations, which can benefit smaller, more cyclical stocks. Today, however, that spread is roughly the same as it was going into the election.
This week, we’ll get the latest economic projections from the Fed. If the picture remains healthy, investors might once again warm to small-caps as the calendar flips to a new year.
