Value or Growth? Large or Small Cap? Which Stocks Outperform in the First Year of a Presidential Term?

The U.S. presidential election is over and investors can finally breathe a sigh of relief, knowing that uncertainty about the result is now in the past. Investors can now properly position their portfolios with some understanding of the incoming administration’s priorities on policy and legislation. While the future will always be uncertain, you can look at past data to see which group of stocks have historically performed better in a president’s first term, regardless of which party is at the helm.

Is a repositioning ahead? 

In recent years, larger stocks have undoubtedly performed better than small-cap and value stocks, as investors have piled into hot technology and artificial intelligence companies, sending their stocks to astronomical valuations. Here’s a look at the performance for large-cap, growth, small-cap, and value stocks since President Joe Biden took office until right before the recent election results.

^SPX data by YCharts.

As you can see, growth stocks have dominated, followed by large-cap stocks, with value stocks and small-cap stocks well behind. However, the first year of a presidential term could trigger a repositioning to value, according to a study conducted by investment advisory and wealth management firm Kovitz, and published in its investment newsletter, The Prudent Speculator. The study looked at how each group of stocks performed by year in a presidential term dating back to 1927.

As you can see, value stocks on average outperformed every year except the third year of a presidential term, although the widest margin is in year one. The Prudent Speculator chalks this up to enthusiasm for the president’s new or refreshed agenda, but also acknowledges that averages don’t always tell the entire story. Investors should also remember that the past doesn’t always guarantee future success.

Interestingly, value stocks have only posted negative returns in three presidential terms: Herbert Hoover, Franklin D. Roosevelt (second term), and George W. Bush (second term).

Is it finally time for value stocks to shine?

It’s possible. Many growth stocks are trading at massive valuations that narrow the margin for error, so investors will be less likely to buy some of these stocks at meteoric valuations, especially when they are looking for above-normal returns. The best investors are unemotional. They love a stock until it hits an unreasonable valuation and then look elsewhere .

High interest rates increase the cost of variable-rate debt. High interest rates also have historically tipped the economy into a recession,

However, in a white paper published by GMO Asset Management in 2023, the common argument that value stocks underperform in a recession was found to be false. Value stocks perform similarly, if not better in recessions, barring the pandemic, which was much different from prior recessions. A big reason for the better-than-believed performance is valuation. Investors don’t expect much from value stocks, so they have less to fall when times are tough.

Donald Trump’s recent victory in the election has pushed many stocks and indexes to all-time highs, including the Russell 1000 Value ETF, as investors bet on tax cuts and pro-growth policies benefiting the entire market. All groups of stocks could be at risk of a pullback at some point. Treasury yields have also increased, which could eventually turn into a headwind for stocks. However, the outperformance of growth in recent years and historical data are both good signs for value stocks.