Small Caps Post Biggest Election-Night Move as Votes Roll In

(Bloomberg) - US equity futures climbed to session highs on Tuesday as polls closed in key states, with the riskiest parts of the stock market posting the biggest swings.

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Futures on the small-cap Russell 2000 Index advanced as much as 3.6% as of 10:02 p.m. in New York, before paring the rally to 2.5%. Contracts on the S&P 500 Index rose 1.2%, while futures on the Nasdaq 100 Index jumped 1.3%.

Although investors said it was premature to place any definitive bets on the election outcome, small caps advanced as Republican nominee Donald Trump jumped out to an early Electoral College lead over Democrat Kamala Harris. The companies, which largely have domestic operations, stand to benefit more from a Trump victory, given his strong protectionist stance.

"Traders have been in and out of the Trump/Harris trade for the last number of weeks," said Quincy Krosby, chief global strategist for LPL Financial. "An unwind could come swiftly, and you don't want to be on the wrong side — better to wait for more announcements particularly Michigan/Pennsylvania."

The rally in small-cap futures builds on gains in the cash index during the day, with the Russell 2000 Index climbing 1.9% in its best session in three weeks. The gauge is still trailing the S&P 500 this year.

Here's what Wall Street investors and other market watchers had to say as the results continued to come in on Tuesday night in New York.

Keith Lerner, co-chief investment officer at Truist Advisory Services:

"It's still very early and I expect we could see some wide swings in both directions. That said, on a short-term basis, several of the betting sites show a steep upswing in former President Trump's odds of winning as early voting results get tabulated. Consequently, we see some of the perceived Trump trades such as small caps, crypto currencies, interest rates and even Trump media having a boost right now. Still, we have a long night."

Thomas Martin, senior portfolio manager at Globalt Investments:

"This is still a jump ball either way for the election. Anything can happen. I don't think the rally in small caps overnight so far actually has anything to do with betting on either a Trump or Harris win despite what some may argue about their policy goals. Many traders are starting to look past the election on expectations that we'll get a result one way or another sooner rather than later, with Wall Street still ending up with an economy that's strong, inflation coming down and the Fed set to cut rates once again. That still benefits the riskiest corners of the market like small caps that have taken a beating from higher rates in recent years."

Matthew Rowe, Head of Cross Asset Strategies at Nomura Capital Management:

"If we take four outcomes of the election such as Republican sweep, Trump with divided government, Democratic sweep and Harris with divided government, only Democratic sweep is seen as negative for the US stock market. And the market doesn't expect this negative scenario to materialize now.

Trump's plans to lower corporate tax rate from 21% to 15% would help small-cap companies. On top of that, small caps are trading at a discount to large caps, and if Trump wins it would be a reason to chase that segment of the market."

Kim Forrest, Chief Investment Officer and Founder, Bokeh Capital Partners:

"Tonight's trading is likely to be people outside of our country making a bet on small caps being able to outperform if Trump and his tariffs are elected. His economic focus on growing American business would lead people into saying small caps could prosper with tariffs.

Most professional investors aren't buying or selling things right now. We like that volume aspect of it. That's why people in other markets are maybe looking at it going: Hey, maybe we can pick up some pennies here.

A lot of small caps have business all over the world. But still investors seem to think small caps equal US."

Daniel Kirsch, Head of Options at Piper Sandler:

"I would expect the VIX to drop significantly over the next few days. Assuming there is a resolution to the election and no other exogenous shocks, hedges will be sold, volatility will drop, which should be positive near term for the market."

Frank Monkam, senior portfolio manager at Antimo:

"If we don't have clear results till tomorrow, there is a chance that we'll see a contested election. In that case, I would want play defensively and buy put options on the S&P 500.

If Trump wins, I think we'll see a Santa Claus rally early and I would want to buy the S&P index rather than specific stocks. Small caps are rallying now but I think higher rates can be a headwind for them.

I'm pretty sure there will be some short-term profit taking even if Trump wins the election, as the market can hit some resistance levels. It could be an opportunity to buy the dip."

-With assistance from Jessica Menton and Norah Mulinda.

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