A look at post-election sector and factor performance - Part III

Key points

• In Part I, we looked at sector and factor performance during the first three months after each U.S. Presidential election year since 1944
• In Part II, we will do the same but look at performance over the first six months after each U.S. Presidential election year
• In Part III, we lay out a simple post-election "strategy" (such as it is)

A simple strategy for post-election six months 

In Parts I and II, we found that the small-cap and value factors outperformed large-caps and growth in the various S&P 500 sectors. Interestingly, small-caps have done best during the first 63 trading days after a presidential election, and value has done best during the second 63 trading days. So, let's test the following strategy:

• Long the S&P 500 Small-Cap index for 63 trading days after a Presidential Election
• Long the S&P 500 Value index for the next 63 trading days after that

For 2024-2025, this would involve:

• Buying small-caps (ticker IWM) at the close of election day (2024-11-05)
• Selling small-caps (IWM) at the close on 2025-02-25 and switching into value (ticker VTV)
• Selling VTV at the close on 2025-05-08 (the 126th trading day after the 2024 election)

At that point, the capital would likely be allocated to some other strategy since the next trading opportunity will not occur until November of 2028.

The chart below displays the hypothetical growth of $1 invested using the simple rules listed above.

For comparison, the chart below also shows the growth of $1 invested by splitting capital 50/50 between small-cap and value for the entire 126-day period.

Finally, the chart below divides the two lines above to show the relative performance of the "Small then Value" approach versus the "Split between the two" approach.

Summarizing performance

The table below displays 126-day performance for the 126 trading days after each election for the following:

• Small-cap first 63 days, value for next 63 days
• 50% Small-cap / 50% Value for 126 days
• Small-cap only
• Large-cap only
• Value only
• Growth only

The table below summarizes the results.

ETFs that track factors

Many ETFs and mutual funds track small-cap, large-cap, value, and growth factors, and investors are encouraged to explore the possibilities independently. The table below offers a "quick and dirty" guide to one choice for each category, with good volume and low expense ratios.

What the research tells us…

The good news is that historical results can be instructive. The bad news is that there is no guarantee that future results will match historical results. Nevertheless, the reality remains that many financial market trends are cyclical, often for reasons that no one can fully explain. Everything in this series falls into this category. Statistically, there can be no debate that small-cap and value factors have consistently outperformed large-cap and growth and most sectors in the months following previous U.S. presidential elections. The (so-called) "strategy" laid out above has historically performed well in the past. How will it do in the future? That remains the open question.