3 Key Insights on the Market’s Big Moves Post-Election and Where Opportunities Lie

The market has been buzzing with activity since Election Day, as investors process a complex mix of news and policy implications. This flurry of market moves, across stocks, bonds, and various asset classes, reflects the current uncertainty and excitement in financial markets. But while plenty of theories about these moves circulate, not all hold up to scrutiny. As a financial advisor, I find that understanding the why behind market moves is essential. So let’s break down three core takeaways on what’s really going on in the market, why recent events matter, and which sectors might be worth watching in the weeks and months to come.

1. Market Rise Post-Election: The Role of Uncertainty Resolution

One of the most notable moves recently was the market’s rally after the election results. Traditionally, markets are nonpartisan and don’t respond in any particular way to which party wins an election. Yet, this time, we saw a noticeable bump in market sentiment after the results came in. Why?

Markets tend to dislike uncertainty far more than they dislike specific candidates or policies. Leading up to the election, many investors were preparing for a long, drawn-out process, expecting razor-thin margins and extended vote counting. Instead, results came in decisively, especially in key areas like the presidency and the Senate. This clarity brought a measure of relief to markets, particularly in removing immediate concerns around corporate tax hikes, which had loomed as a possibility under a different administration.

While the election didn’t eliminate all uncertainty, it did help reduce anxieties around certain tax policies. Investors took this as a cue that they could breathe a little easier, and this likely contributed to the market’s upward swing. In times like these, the market’s reaction is less about partisan preferences and more about a clear and stable path forward—something that reassures investors and encourages buying.

2. Rising Long-Term Rates: A Cause for Concern?

The bond market, particularly the rise in long-term interest rates, has been another focal point for investors recently. The Federal Reserve’s efforts to stimulate the economy by lowering short-term rates haven’t stopped longer-term rates, like the 10-year Treasury yield, from increasing. This rise has spurred conversations around what it might mean for borrowing costs, inflation, and economic growth.

Long-term interest rates often reflect market expectations of economic growth. Rising 10-year rates suggest that investors expect stronger growth in the coming years. While some worry that higher long-term rates might counteract the Fed’s rate cuts and slow the economy, history tells a different story. Market performance has generally fared well in periods when long-term rates have risen alongside Fed rate cuts. Data shows that when the Fed has been cutting rates and 10-year Treasury yields have risen, the S&P 500 has often delivered strong returns.

Why does this happen? Typically, growth drives the stock market more than rates do. When long-term rates rise, it usually signals an improving economic outlook, which tends to support higher stock prices. The market’s current reaction appears to align with this view—higher rates might simply reflect higher growth expectations, not impending trouble.

Looking back at similar periods since 1962, we see that when the Fed was cutting rates, the 10-year yield was rising, and leading economic indicators were trending up, the S&P 500 experienced gains in 97% of the subsequent 12-month periods. This pattern bodes well for stocks, as it implies the market expects sustained growth. However, it’s always crucial to remember that past performance doesn’t guarantee future outcomes.

3. Forward-Looking Opportunities: Small Caps and Financials

With the election results settled, investors are now looking ahead to how policy changes could impact specific sectors. Historically, investing based on anticipated policy shifts can be tricky, as stocks often price in these changes early, potentially overshooting or underestimating their true impact. But today, two segments stand out as promising due to both their setup and potential policy support: small-cap stocks and financials.

Small-Cap Stocks

Small-cap stocks, which include companies with smaller market capitalizations, have lagged behind larger tech-driven stocks in recent years. These stocks are generally more sensitive to economic growth trends, which could play to their advantage in a positive-growth environment. They also tend to benefit from Fed rate cuts, making them appealing given the current low-interest-rate environment.

Beyond growth potential, small caps are also trading at a wide range of valuations, suggesting that investor caution is still high in this segment. This discrepancy between high and low valuations presents an opportunity, as it reflects a degree of fear among investors. Furthermore, small caps are typically more responsive to corporate tax policy shifts, which makes them particularly appealing now that corporate-tax uncertainty has lessened. This confluence of factors makes small-cap stocks a segment to watch closely.

Financial Stocks

Like small caps, financial stocks have been trading at low valuations relative to other sectors. Historically, this sector tends to perform well when it is undervalued, as it is today. The current setup for financials is unique: not only are valuations attractive, but there’s also potential for regulatory relief, which could make the sector more appealing.

Financials could benefit from lower capital requirement regulations, which may come under the incoming administration. Reducing these requirements could increase banks’ ability to lend, ultimately supporting broader economic growth. This scenario, combined with the undervalued state of financial stocks, presents a compelling setup for potential gains.

Both small-cap and financial stocks received a boost in the past week, but it’s possible they haven’t yet reached their full potential. For investors looking for areas that are poised to benefit from economic growth and policy clarity, these sectors offer promising opportunities.

Conclusion: Putting It All Together

Recent market moves underscore the importance of understanding the factors driving market behavior. This post-election period reminds us that while the market is nonpartisan, it is highly sensitive to uncertainty and clarity. The rally in stocks post-election may stem more from reduced uncertainty than from any particular policy or candidate outcome. Similarly, rising long-term interest rates may reflect an optimistic economic outlook rather than an immediate warning sign.

For investors, these shifts offer valuable insights. Keeping an eye on sectors poised for growth, such as small caps and financials, may provide solid opportunities in the current environment. At the same time, it’s critical to approach these moves with caution, recognizing that markets can be unpredictable, especially in periods of rapid change.

As we move forward, remember that the market’s reactions are often rooted in deeper economic signals, not just surface-level events. Staying focused on fundamentals, looking for clarity amid uncertainty, and remaining patient will be key strategies for navigating this dynamic landscape. While big moves can be exciting—and sometimes unnerving—keeping a steady hand and an informed perspective can lead to smart, strategic investment decisions in the long run.