Investors can now breathe a sigh of relief as the U.S. presidential election has come to a close, putting an end to the uncertainty surrounding the result. With the incoming administration’s policy and legislative priorities becoming clearer, investors can now make informed decisions about positioning their portfolios. Looking at historical data, it is worth considering which group of stocks has historically performed better in a president’s first term, regardless of party affiliation.
In recent years, larger stocks have outperformed small-cap and value stocks, driven by the surge in technology and artificial intelligence companies. However, a study conducted by investment advisory and wealth management firm Kovitz, published in its investment newsletter, The Prudent Speculator, suggests that the first year of a presidential term could trigger a repositioning towards value stocks. The study analyzed the performance of different stock groups in each year of a presidential term dating back to 1927, revealing that value stocks have consistently outperformed every year except the third year.
The Prudent Speculator attributes this trend to the enthusiasm surrounding a president’s new or refreshed agenda. However, it also acknowledges that averages do not always tell the whole story, and past performance does not guarantee future success. Notably, value stocks have posted negative returns in only three presidential terms: Herbert Hoover, Franklin D. Roosevelt (second term), and George W. Bush (second term).
The current market landscape suggests that it may be time for value stocks to shine. Many growth stocks are trading at astronomical valuations, leaving little room for error. Investors may be less inclined to buy these stocks at such high valuations, particularly when they seek above-normal returns. The best investors remain unemotional, loving a stock until it reaches an unreasonable valuation and then seeking alternatives.
Contrary to common belief, a white paper published by GMO Asset Management in 2023 found that value stocks perform similarly, if not better, in recessions, except for the unprecedented circumstances of the pandemic. Valuation plays a significant role in this better-than-expected performance, as investors have lower expectations for value stocks, resulting in less downside during challenging times.
Donald Trump’s recent election victory has propelled many stocks and indexes to all-time highs, including the Russell 1000 Value ETF. Investors are optimistic about potential tax cuts and pro-growth policies benefiting the entire market. However, all groups of stocks could face a potential pullback, especially considering the increase in Treasury yields, which may eventually pose a headwind for stocks.