Small-cap traders are heading into a midterm vote with the Russell 2000 already up roughly 15.1% year-to-date. That's a strong start for a part of the market with a mixed midterm record. Whether the conditions behind that rally can hold through the vote and into next year is what matters now, and history may offer some insight.
To analyze this correctly, it helps to look separately at the period leading into the election and the months that follow, as those two periods have often behaved differently. The focus is what could support a repeat of historical patterns, what could prevent that and how traders can manage their exposure to election-related volatility.
Before the Vote
Furey Research, a firm specializing in small-cap investment research, reviewed 11 midterm election years and found that the Russell 2000 averaged a gain of just 0.5%, finishing higher only 45% of the time. Eight of those years produced negative or below-average returns, and small caps underperformed large caps in the three most recent midterm years: 2014, 2018 and 2022.
Keep in mind those are full-year numbers and shouldn’t be framed as if the returns were earned only before Election Day. A weak calendar year can still include a strong rally after the vote, and a year that finished positive can still have underperformed for much of the way there.
Broader market research from Fidelity also finds a history of weaker returns and greater volatility in midterm years, followed by stronger performance afterward. This makes the election calendar a useful backdrop, though it doesn’t mean that September and October have to be weak, or that selling automatically ends when voting does.
After the Vote
The strongest supporting number comes from a Fidelity study covering 1950 through 2009. Across 15 midterm periods, small caps averaged 31.2% from November of the election year through the following October, versus 23.4% for large caps. Over the full 1950-2009 period, small caps averaged 13.5%.
Fidelity used the Ibbotson Small Cap Stock Index, not the Russell 2000, and its data ends in 2009. That leaves out the last four midterm elections: 2010, 2014, 2018 and 2022.
Measured over the same November-to-October window, the midterms since 2009 look very different. Using the Russell 2000 as the modern small-cap stand-in, the four completed midterm stretches since 2009 (2010-11, 2014-15, 2018-19, and 2022-23) returned about +5%, -1%, +3%, and -10%, for an average near zero. This more recent sample also sits against a different policy backdrop.
After 2008, the Fed was no longer just setting the overnight rate and stepping back; it was buying bonds, pinning longer-term yields and providing the market with clarity around policy direction via the 2% inflation target. The old 31.2% average is a 1950-2009 number and is not what that same window delivered once this next era began.
Reduced policy uncertainty is one possible explanation for overall better small-cap performance after elections. However, earnings, economic growth and borrowing conditions still matter, and an election result doesn’t make those risks disappear.
The Bull Case
There have been standout midterm years for small caps, including 1982, 2006 and 2010. The monetary backdrop differed in each: rates fell sharply in 1982, the Fed finished its hiking cycle in 2006 and it announced a second round of quantitative easing in 2010, according to Furey Research.
The current setup is different. The Fed’s latest decision raised rates by a quarter point to 3.75%-4.00% in a unanimous vote, meaning the immediate bullish argument has to work with higher rates.
For me, that argument starts with growth holding up, earnings improving and the market becoming comfortable with how much additional tightening may be needed. Small caps have greater exposure to domestic revenue and floating-rate debt than large caps. A healthy U.S. economy can support small caps, even while higher borrowing costs create a headwind.
Russell's rally has been strong, although as of the September 22 close, only about 35% of its stocks were above their 50-day moving average and 54% above their 200-day. Breadth is improving, but broader participation would provide stronger support for the rally.
The Bear Case
Recent history gives ample reason to control risk. The Russell 2000’s total return was approximately -11% in 2018 and -20.4% in 2022. Those were full-year losses, not measures of what happened directly after the election.
The Fed’s latest projections also showed 16 of 18 participants judging that a higher year-end policy rate would be appropriate. Twelve projected the equivalent of one additional quarter-point hike, and four projected two. Those are individual projections, not a commitment from the committee. As of early October, the CME FedWatch tool shows investors are pricing in a 68% probability of another 25-basis-point hike.
If borrowing costs remain elevated while growth slows, smaller companies can face pressure from both directions. Revenue becomes harder to grow, while interest expense and refinancing become more difficult to manage. That’s particularly relevant for businesses already struggling to produce consistent profits.
The year-to-date rally also raises a question: how much of the upside is already priced in? Strong performance so far doesn’t mean those gains were pulled forward, or that there isn’t much left from here. However, it does raise the bar for the next leg higher.
A weaker economy or tighter credit conditions could keep pressure on small caps well beyond the vote. I wouldn’t remove a hedge simply because Election Day is over.
Managing Midterm Risk
The midterm calendar is a valid reason to reassess small-cap risk, but not a reason for a seasonal position. I’d start with the move that would prove you wrong, and the amount you can lose if the vote or the weeks around it get complicated.
CME Group’s Russell futures offer a way to add, reduce or hedge that exposure without using the cash index. E-mini Russell 2000 futures (symbol RTY) and Micro E-mini Russell 2000 futures (symbol M2K) let you size that exposure precisely — one Micro provides one-tenth the exposure of one E-mini at the same futures price. That matters around an election, when the goal may be to fine-tune risk rather than increase it.
Where defined risk or asymmetric exposure is required, options on RTY futures offer an additional layer of capital efficiency. Buying options caps downside loss directly to the premium paid, while trading both the underlying futures and options within the same clearing ecosystem generates cross-margining capital savings.
If the concern is small caps swinging more than large caps into or after the vote, you can hedge the relative move rather than make an outright position. Buying Russell futures and selling E-mini S&P 500 futures (symbol ES,or Micro S&P, symbol MES), expresses small-cap outperformance, the reverse hedges against small caps lagging. A spread like that can reduce some market-wide risk, though it doesn't eliminate it — contract values and volatility differ, and that relationship can change.
Price action and overall portfolio risk should still decide the need for a hedge. Until that is clear, the job is to manage the volatility the vote can bring, not to force an Election Day trade.
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