The US election is over (or nearly over), but there’s no sign yet that the end is near for the leadership of growth and momentum risk factors in the US equity market.
All the main slices of the market’s risk-factor universe popped yesterday, on the first day following the election (Nov. 4), but the familiar trends in recent history haven’t changed, based on a set of exchange-traded funds.
Mid-cap growth remains the top-performing factor rebound off the Mar. 23 trough (the bottom of the cornonavirus crash for US stocks). The iShares S&P Mid-Cap 400 Growth ETF (IJK) is up 66.9% from that bottom – well ahead of the broad market’s 51.4% gain via SPDR S&P 500 (SPY).
Large-cap momentum (MTUM) and large-cap growth (IVW) are close second- and third-place leaders, respectively. Notably, small-cap growth (IJT) and small-cap core (IJR) are in strong fourth- and fifth-place positions, respectively. Are small-cap stocks poised to take the lead?
Optimists point to the modest outperformance in recent weeks for small-cap shares. Are we finally at a turning point that puts small-caps in the leadership chair for equity factors?
Yahoo Finance considered the possibility yesterday, noting that this corner of the market enjoyed a strong October: “Hopes of a second round of US fiscal stimulus post-election, decent consumer spending, rising virus cases beyond the border and an uptick in small-business optimism index have led to the small-cap outperformance.”
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The site reminds that “the road ahead is mixed with perils and possibilities. It is beneficial for small caps that both Democrats and Republicans support another $1200 stimulus check to households. If this happens, one can expect more consumer spending and a rally in small-cap stocks that are mainly focused on domestic activities.”
Meanwhile, value stocks in all corners of capitalization continue to lag. Ahead of the election a theory was circulating that a Biden/Democratic sweep in Washington would usher in a new wave of bullish momentum for small caps on the assumption that a huge increase in fiscal spending would be especially beneficial for this corner of the equity market. But as we now know, the Republicans held on to the Senate. Biden still appears headed for an Electoral College win, at least as of early Thursday, divided government is set to prevail.
A split Congress and the presidency still bodes well for stock prices generally, predicts Wharton Professor Jeremy Siegel. “I think Biden is going to win this and I think very definitely the Senate is going to stay Republican and truthfully that combination is excellent for the economy and it’s excellent for the markets.”
Analysis by LPL Financial supports that outlook: history suggests that divided government tends to be a winner for stocks.
A split Congress and White House means that ‘the chances of higher taxes and more regulation likely took a hit under this scenario,” LPL advises. “This could be a nice tailwind for stocks, as the S&P 500 historically has done quite well under a divided Congress, up more than 17% on average. Additionally, in years with a divided Congress, stocks have been higher the past 10 times, with 2020 potentially being the 11th in a row.”
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