US small-caps historically shine in presidential election years

The current political landscape and stock market conditions are showing unusual volatility simultaneously, driven by distinct catalysts. The 2024 election year has introduced unexpected events, including an attempted assassination and significant shifts in candidate dynamics, which coincide with a marked change in market leadership.

In July, small-cap stocks began to outperform mega-cap stocks, but this was followed by a market decline due to the unwinding of a substantial global carry trade linked to the yen's interest rate hike by the Bank of Japan. Although US markets are stabilizing, uncertainties persist.

Historical data suggests a pattern of small-cap stocks, represented by the Russell 2000 Index, outperforming large-cap stocks, indicating potential future advantages for small-cap investors. Patience and caution remain essential, but there’s optimism for small-cap investment as the election approaches.