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The 2016 Presidential election saw considerable character assassination and severing of diplomatic ties, making it one of the most action-packed events in the recent past. Republican candidate Donald Trump accused Democrat Hillary Clinton of being corrupt and requested voters to “deliver justice at the ballot box”. Clinton, on the other hand, got a clean chit from the FBI for the email controversy that had marred her campaign in recent times.

Meanwhile, apprehensions surrounding the elections are expected to dissipate once the U.S. gets a new president. And, as has been proven historically, markets will gain stability post elections which calls for investing in small-cap stocks that offer stellar returns, way more than their mid and large-cap counterparts.

FBI Clears Clinton

The FBI found no new evidence to warrant the charges against Clinton, a sign of relief for investors who see slim chances of a Trump presidency. While the Clinton camp was “glad” about the FBI decision, the bureau’s review was vehemently criticized by the Republicans.

According to the final Reuters/Ipsos States of the Nation project, Clinton has a whopping 90% chance of making it to the White House. The survey also mentioned that the wind might turn in favor of Trump only if there is an unlikely turnout of white, black and Hispanic voters in six or seven states (read more: Clinton's Odds of Winning Presidency High: Top 5 Picks).

How Can Clinton Reach 270 Electoral Votes?

Clinton has two broad ways to reach 270 electoral votes. She needs to hold on to her six “firewall” states including Virginia, Colorado, Wisconsin, Michigan, Pennsylvania and New Hampshire. In these states, she has led the vast majority of polls this year. If she wins here and manages to hold on to the solid democrat states, she will win the presidency without even needing to win swing states such as Florida, North Carolina, and Nevada.

However, if she loses one or more firewall states then she will have to make up for the losses in the swing states. Over the course of the campaign, there has been stiff competition in these swing states, which suggests that these states are less pro-Clinton. If the firewall states let her down, there is a risk of her losing in swing states. Lest we forget, Trump’s support is concentrated among non-college educated white voters who have a considerable share of the electorate in several firewall states.

S&P 500 Predicts Trump Win

While a number of polls and prognosticators demonstrates Clinton’s lead over Trump, there is one indicator that buck’s the trend. Per the S&P 500 stock market index, Trump has an 86% chance of winning the election. The indicator has almost been correct 86.4% of the time since 1928. And the last time it was incorrect was when Ronald Regan won in 1980.

Bloomberg added that more or less the incumbent party wins the election when the stock market goes up. However, the S&P 500 is down 3.2% since Aug 8, a favorable sign for Trump (read more: 3 Stocks to Watch After Donald Trump's Debate Performance).

Small-Caps Best Buys, No Matter Who Wins

As U.S. presidential election is on a knife-edge, apprehension surrounding the outcome is looming large. But, once a new president is elected, the equity market will start performing well.

The year subsequent to the presidential election, is mostly a profitable one for the S&P 500. Only once in the last eight elections, the S&P 500 finished in the red. In the first year after the last eight elections, the S&P 500 had surged 19.4% on an average. Gains were also broad-based, with the tech-laden Nasdaq averaging a 19.36% gain in the year after the election. However, it is the Russell 2000 index of small-cap stocks that topped all of them, with an average gain of 20.2%. The following table compares all the three indices’ returns in years following elections:

Year

S&P 500 (%)

Nasdaq (%)

Russell 2000 (%)

1985

31.73

31.36

31.05

1989

31.69

19.26

16.26

1993

10.08

14.75

18.88

1997

33.36

21.64

22.36

2001

-11.89

-21.05

2.49

2005

1.37

4.91

4.55

2009

26.46

43.89

27.17

2013

32.39

40.12

38.82

Average

19.40

19.36

20.20

Source: www.investmentu.com

As seen in the table, small-caps have outperformed the S&P 500 in five out of the last eight cycles, including the last four. If we streamline further, Russell 2000 value stocks have registered an average gain of 21.6% in the year following an election, while Russell 2000 Growth stocks clocked an average gain of 18.77%. In fact, small-cap growth stocks have posted 34% plus gains in the last two years following an election (read more: Portfolio Strategy for 2016 Presidential Election).

5 Solid Choices

Both the categories of small-cap stocks are set to scale higher post the election. To top it, the broader markets may launch into a strong rally. A number of economic reports including positive employment report, productivity data, factory orders and the nonmanufacturing ISM survey largely underline solid economic growth.

We have, thus, selected five small-cap stocks that have tremendous financial strength and are also poised to grow in the near term. Such stocks have market-cap below $2 billion and boast a VGM score of ‘A’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. Such stocks also flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ACCO Brands Corporation (ACCO - Free Report) manufactures, markets, and distributes office, school, and calendar products. The company has a price-to-earnings ratio of 12.59, compared with 15.20 for the industry. ACCO Brands’ estimated growth rate for the year following the election is pegged at 9.8%.

Norbord, Inc. (OSB - Free Report) manufactures, sells, markets, and distributes wood-based panels for retail chains, contractor supply yards, and industrial customers. The company has a price-to-earnings ratio of 14.26, compared with the industry’s 20.30. Norbord’s estimated growth rate for the year following the election is 69.4%.

Sanderson Farms, Inc. (SAFM - Free Report) is an integrated poultry processing company. The company has a price-to-earnings ratio of 10.73, compared with 14.60 for the industry. Sanderson Farms’ estimated growth rate for the year following the election stands at 4.6%.

Standard Motor Products Inc. (SMP - Free Report) manufactures and distributes replacement parts for motor vehicles in the automotive aftermarket industry. The company has a price-to-earnings ratio of 16.39, compared with 19.60 for the industry. Standard Motor’s estimated growth rate for the year following the election is 14.6%.

TTM Technologies Inc. (TTMI - Free Report) , together with its subsidiaries, manufactures printed circuit boards (PCBs) worldwide. The company has a price-to-earnings ratio of 10.8, compared with the industry’s 14.20. The company’s estimated growth rate for the year following the election is 12.9%.

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