While a quick and decisive result for the US presidential election provided certainty for investors, it has also unleashed a rally among small-cap stocks.
According to new insights from Morningstar Indexes, history is repeating itself. Small caps rallied after presidential elections in both 2016 and 2020. According to Morningstar Indexes Strategist Dan Lefkovitz, the Morningstar US Small Value Index was the best performer of the nine style box segments after the 2016 and 2020 US elections, just as it was on Nov. 6, 2024 when Donald Trump was crowned the victor. In both previous instances, the small-cap rally came back down to earth when market fundamentals reasserted themselves.
What are some of the reasons behind the current post-election rally for small caps? The market is betting that animal spirits will be unleashed by Trump’s policies of tax cuts and deregulation — and small-cap stocks are economically sensitive. Tariffs are also seen to be a boon for small stocks. Data presented show that the Morningstar US Small Value Index derives nearly 80% of its revenues domestically, compared with 54% for large-cap growth.
Dan Lefkovitz – Strategist, Morningstar Indexes
“The market expects domestically focused, economically sensitive areas like financial services, basic materials, consumer cyclicals, and real estate to thrive under Trump. All are well-represented in small-cap land. But we’ve seen this movie before. The small-cap rallies of 2016 and 2020 fizzled.”
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