Small-cap indexes outperform the S&P 500 ahead of the U.S. election

The Russell 2000 and S&P SmallCap 600 indexes, which track the shares of smaller and medium-sized companies, advanced on Monday, November 4. MarketWatch reports that small-cap stocks are being buoyed by the U.S. presidential election and the Fed decision this week.

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On Monday, the Russell 2000, which comprises 2,000 small-cap stocks, gained 0.40%, while the S&P SmallCap 600 added 0.48%.

In contrast, large-cap indexes closed in the red. The S&P 500 dipped 0.28%, the blue-chip Dow Jones index lost 0.61%, and the tech-focused Nasdaq Composite slid 0.33%.

“Small-cap stocks are getting a lift from lower Treasury yields and as Trump’s odds of winning the election on betting markets improved a bit from the weekend,” José Torres, a senior economist at Interactive Brokers, told MarketWatch.

Additionally, the FOMC will meet this week and make a rate decision. Markets expect a rate cut for the second meeting in a row, which bodes well for smaller companies with higher debt.

Small caps and the election

The U.S. presidential race between Republican Donald Trump and Democrat Kamala Harris could be among the closest in the history of American politics, as reported by the New York Times. The latest national polls show Harris holding a 4-point lead over Trump, just outside the poll’s 3.5% margin of error. A weekend poll even put Harris ahead of Trump in Iowa, a state that last voted Democrat in 2012.

MarketWatch sees a Trump presidency as particularly bullish for smaller companies, which tend not to have overseas operations, and expects them to benefit the most if Trump fulfills his campaign promises to cut corporate taxes and scale back regulation in certain sectors.

“Many investors view small-cap stocks as a potential ‘Trump trade,’” noted Goldman Sachs analysts back in July. Trump’s “America First” approach, together with plans to raise tariffs on Chinese imports, could boost U.S. small- and mid-cap stocks, James Yardley, a senior research analyst at Chelsea Financial Services, has pointed out.

Small caps and interest rates

Smaller companies are more sensitive to interest rates than their larger peers. The former usually have weaker balance sheets, a higher debt load, and less fixed-rate debt, MarketWatch notes.

In September, the Fed cut rates for the first time since 2020. Antony Creighton of Lazard Asset Management called this an “inflection point” for small caps. In mid-October, small-cap indexes reached their highest levels since November 2021. Two more Fed meetings are scheduled this year (including this week’s), with analysts expecting rates to be cut further.