As happily committed capitalists, we don’t typically find ourselves looking to dead Soviet leaders for much of anything, but last week was so eventful that we thought of Vladimir Ilyich Lenin’s quote: “There are decades where nothing happens; and there are weeks where decades happen.”

We not only had a presidential election that saw a Republican wave following a highly contentious campaign season, but just as that news was sinking in, with votes in a few congressional elections not yet fully counted, the markets skyrocketed—with small-caps leading the advance. On Wednesday, November 6th, the Russell 2000 Index rose 5.8% while the large-cap Russell 1000 Index and the mega-cap Russell Top 50 Index were each up 2.7%. It was also notable to us that returns within small-cap were pretty closely aligned: the Russell 2000 Value Index increased 6.3%, the Russell 2000 Growth Index was up 5.4%, and the Russell Microcap Index advanced 6.0%. The Russell 2000’s November 6th returns was the 27th highest daily return since the small-cap index’s 12/31/78 inception. This sharp and rapid ascent was then followed by another significant development when the Fed announced on Thursday, November 7th that it would be cutting rates by another 25 basis points.

With the caveat that every election year occurs in its own specific historical context, we looked at what has happened historically in prior presidential election years. The chart below has the details, which we hope are as encouraging to small-cap investors eager to see sustained leadership for the asset class as we are.

Average Total Returns for the Russell 2000 and Russell 1000 After the Last 10 Presidential Elections
As of 9/30/24

Past performance is no guarantee of future results.

In the spirit of bipartisanship, we note that small-cap’s robust record following elections has been remarkably consistent, with impressive strength regardless of which party or policy goals were in the ascendant. This tells us that small-cap’s post-election record has been driven more by psychology than ideology. Once elections are decided, investors feel as though they can see a more certain course ahead than was the case before ballots were cast.

In terms of the Fed’s 2024 rate reductions, which now total 75 basis points, we remain agnostic about their long-term effect on stock prices. However, because many observers have been pinning the prospects for a sustained period of small-cap leadership to lower rates, we examined what small-caps have done following previous cuts. Our research took us back to November of 1957 (Fed Funds rate data goes back to July of 1954, with the first cut in 1957). As we always do when looking farther back than the 12/31/78 inception date for the Russell 2000 and Russell 1000, we used the Center for Research in Security Prices 6-10 (“CRSP 6-10”) and CRSP 1-5 Indexes as our respective proxies for small- and large-cap stocks. The chart below shows that small-caps beat large-caps in the 3-, 6-, and 12-month periods following Fed rate reductions—and averaged double-digit returns in each period.

CRSP 6-10 and 1-5 Performance After Initial Fed Rate Cut
From the Feds First Rate Cut in November 1957 through 9/30/24¹

¹There have been a total of 13 rate cut cycles
Past performance is no guarantee of future results.

There are concerns, of course. The most important of which centers on tariffs, which have historically been inflationary, tamping down demand. The timing and reach of tariffs are developments we’ll be watching closely—and management teams of many holdings have been surveying as best they can the possibility of an altered global trading landscape.

However obvious, it’s also worth pointing out that history seldom repeats itself. Yet we find the persistence small-caps’ advantage over large-cap following both rate cuts and elections quite striking. So, while recent events in politics, the economy, monetary policy, and the markets offer timeless lessons in the importance of patience and caution, we are hopeful that small-cap investors will find plenty to cheer about in the years ahead.

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