Election Year Playbook, Part 3: Top Sectors to Buy

By TradeSmith Research Team

Listen to this post
Last week we kicked off our election-year playbook.

We studied history to get an outlook for the S&P 500 and learned how the first quarter typically falls before jumping in the back half of the year.

Then we dove down further and analyzed which size of companies perform the best on a one-year basis. Turns out, small-cap companies nearly double the S&P 500 to the tune of 10% versus 5.8% for large-cap companies.

I’ve been mighty vocal about owning small caps since October. This only furthers the case. And it’s great ammo to have in your investing arsenal.

But today, we’ll take our election guide a step further, focusing on which sectors to own. As always, we’ll let historical evidence help cast our vote.

And the results are a wake-up call for those who think this year will be a repeat of last.

In short, if you believe technology and A.I. stocks are the only games in town… I’ve got news for you.

There are two sectors you should keep on your investing ballot in 2024. And neither of them are anywhere near tech. In fact, both are set to outperform tech by nearly double.

But before we jump into that killer study, let’s set the stage with the most important driver of the last six months… because it’ll fuel our election-year sector playbook.

Remember These Sectors When the Final Fed Hike is In

The last few months, stocks have staged an epic run. Since markets bottomed in late October, we’ve seen double-digit gains across the board.

Small caps, large caps, REITs and more have benefited due to one simple theme: the expectation of falling interest rates.

In early November, global yields were declining rapidly as investors bet heavily that the Federal Reserve was done hiking rates.

In one of my favorite studies of the year, we showcased how the Financial and Health Care sectors gain the most once the final hike is in — to a tune of 30% and 29%, respectively:
Since that post, the Financials Select Sector SPDR Fund (XLF) has gained 13.5% while the Health Care Select Sector SPDR Fund (XLV) has vaulted 9.84%… both beating the S&P 500 (SPY) in that time frame.

As I’ve said many times before, history and proof can help during challenging markets.

Not only that, as investors, we should stack the odds in our favor when making bets.

Given these two groups are still in the driver’s seat based on the falling rate regime, there’s another big reason to expect outperformance from them in 2024…

Top Sectors During Election Years

We know that first quarters often bring bouts of volatility during election years.

Not only that, small caps tend to suffer in the first half of the year, before springing back to life into year-end.

In other words, expect rips and dips all throughout 2024.

That said, there are clear sector outperformers when you study history. Check this out…

During election years going back to 1996, the S&P 500 has drastically underperformed its long-term average, with a meager 2.8% return.

This is much less than the typical 10% gain the market has offered annually over decades.

BUT, when you dive below the surface, Health Care and Financials shine brighter than the rest.

When you average out the prior seven election years back to 1996, the Health Care sector gains 7.5% with Financials not far behind, returning 7%:
When you tie this leadership in with our first study, it’s clear these areas should be worth serious consideration this year. We have an election year ahead AND a final Fed rate hike behind us. That’s a double whammy for Financials and Health Care.

Now, 7% gains may not sound like much, until you realize recent election years include the dot-com bust of 2000, Great Recession of 2008, and COVID-19 pandemic crash of 2020… making it all the more impressive.

And right now, Health Care is leading the sector charge year-to-date with a 3.13% performance.

It appears this playbook is already in place with big investors… And that means more opportunity for you.

Combining all these factors, investors should start looking at high-quality, smaller-cap Financial and Health Care stocks to buy ahead of a major surge in the second half of this year.


Lucas Downey
Contributing Editor, TradeSmith Daily