Small-cap stocks, often overlooked in the fervor of broader market movements, are showing signs of a potential breakout post-election. A confluence of historical trends, recent market dynamics, and anticipated policy changes suggests these often-volatile stocks may be poised for significant gains.

Historically, small-cap stocks have exhibited a tendency towards strong performance in the period leading up to November, particularly in election years. This pattern, observed over the past few decades, indicates a cyclical trend that could be repeated this year. 

Adding to that history, recent market performance of small-caps further strengthens the case for a November surge. While the broader market, as represented by the S&P 500, has seen a robust rally in recent weeks, small-caps have lagged behind. This divergence suggests a potential catch-up rally, with small-caps playing catch-up to their large-cap counterparts.

The Russell 2000, a key index tracking small-cap stocks, has been a notable underperformer in the recent market upswing. This underperformance, coupled with these historical trends, paints a picture of a potential opportunity for investors. The Russell 2000 could be ripe for a period of “bottom fishing,” where investors seek out undervalued stocks that have the potential for significant upside.

Examining the historical data of the Russell 2000 reveals a compelling pattern. In several instances over the past few decades, the index has experienced substantial rallies in the days and weeks leading up to presidential elections. These rallies, often exceeding 6.5% in a short period, highlight the potential for significant gains in small-cap stocks during this timeframe.

This Year Is Different

While every four-year cycle presents unique market conditions, historical data underscores the potential for substantial upward movements in the Russell 2000 this November. This potential is further amplified by the current macroeconomic environment and anticipated policy changes.

Policy changes like adjustments to tax rates, tariffs, and regulations, could significantly impact small-cap stocks, should Harris lose this year. These changes could boost investor confidence and encourage a rotation into riskier, underperforming small-cap stocks. Even in the absence of specific policy outcomes, the current macroeconomic conditions suggest that small-caps are well-positioned to perform favorably relative to large-caps.

The market’s current sentiment indicates that a Trump win is not fully priced in. This suggests a potential shift could trigger a bout of market volatility, which would eventually subside once the outcome is determined. However, this volatility could also create opportunities for astute investors to capitalize on the potential surge in small-cap stocks.

A confluence of historical patterns, recent market dynamics, and anticipated policy changes suggests that small-cap stocks could be poised for a significant rally in November. While investing in small-caps always carries a degree of risk, the potential rewards in the current environment could be substantial. I recommend that investors with a long-term horizon and a tolerance for volatility consider increasing their exposure to small-cap stocks as the election approaches.