As we approach the end of the year, we at Cornerstone wanted to take the time to review what’s transpired over the last 12 months. Doing this helps us reflect on where we started, what our message was, and how we navigated some of 2024’s uniqueness from a market perspective.
Additionally, after today the remaining posts for this year will be a two-part series on CFS’ 2025 market outlook.
But first, let’s have a 2024 reflection.
Four Critical Inflection Points
Clearly, nobody is perfect when it comes to prognostication or opinions based on quick reflection. That said, we’ve been able to identify four critical inflection points that required data reliant navigation this year.
Let’s go over them and be thankful that the S&P 500* delivered solid overall performance for a second consecutive year.
Overweighting Small- And Mid-Cap Stocks
About a year ago, many questioned the sustainability of the market rally.
Not us. We couldn't have been more excited at the time since our data indicated the market’s behavior was changing. We could see a broadening of the market overall, leading to 2024’s eventual unsung hero…small- and mid-cap stocks.
Near the end of 2023, there was an extremely rare bullish indicator. That is, the S&P SmallCap 600# rallied almost 5.5% in one trading session.
History showed that when small-cap stocks rally 5% or more in a day, they tend to run hot for a while. Given this happened at a time when most people were solely focused on big technology stocks, it was an indicator that the market would broaden in the future.
Of course, that turned out to be true as small-cap stocks surged 25.7% in the following 12 months from that signal:
Furthermore, in the summer we again directed our attention to additional bullish indicators specifically related to small- and mid-cap stock gains causing even more market broadening. The beginning of this outperformance was July 11. That’s when the small-cap laden exchange-traded fund iShares Russell 2000 ETF (IWM)^ started leaving the tech-heavy Invesco QQQ Trust (QQQ)^ behind, which is rare.
Again using history as a guide, it seemed that overweighting small- and mid-cap stocks would be like riding the wave of a broadening market. Once again, that historical data turned out to be prescient.
Since July, IWM is up 14.6% versus 3.5% for QQQ:
Thankfully, these two inflection points were able to be gleaned from an objective, data-based research approach.
Financial Sector Becoming Popular
Looking back almost a year ago, we noticed significant “big money” investor buys in financial stocks, despite the popular narrative not yet catching up to that trend.
Again leaning on historical data, we noted that when “big money” inflows into financial stocks are extreme, the sector typically skyrockets afterwards. Using the Financial Select Sector SPDR Fund (XLF)^ as a proxy for the sector, you can see the forward returns are incredible:
As of this writing, XLF is up 31.4% for the year.
This data gave us foundational confidence to reintroduce a handful of financial holdings into our proprietary portfolio models, including:
We’re once again thankful for the advanced notice that “big money” data provided us in our research prior to the financial sector becoming popular with the financial media later in the year.
The Average Stock Would Significantly Outperform
In the summer, our data began to indicate a non-consensus signal. That is, a significant reversion trade was beginning, despite the world being fascinated with huge tech firms. We could see it when we analyzed the equal-weight S&P 500 versus the market-weight index.
When looking at the Invesco S&P 500 Equal Weight ETF (RSP)^ versus the standard market-weight index, we found the RSP/SPX ratio fell below 32%. That level is historically meaningful and indicated the average stock should significantly outperform the market-weight index moving forward.
So far that’s played out as the equal-weight index is up 15% versus the market-weight index’s 11% since June:
Be Patient
This inflection point is the most recent, so perhaps it’s most memorable. From Oct. 24-31, the market saw steep declines, with the S&P 500 off about 1.8% overall. Many individual stocks were down significantly more.
Back then, our message heading into the end of election season was to be patient. As far as historical data indicated, November to April of election years were historically bullish months, especially for small and mid-cap out equities.
As a refresher, remember that November kicks off this seasonally strong period:
That suggested to us that removing emotion and buying any dips at that point was a preferable stance. True to form, the S&P MidCap 400& was up a staggering 9.4% in November alone and the S&P SmallCap 600 was up 11.6% in that same time.
Plenty of New Leadership to Come
With the benefit of hindsight, we can clearly see that 2024 was a year of rotation, breadth, and reversion. Left-behind stocks became front page news. Thankfully, we’ve been able to recognize these trends via “big money” data.
Looking to next year, the data is clear that this reversion trade is far from over. As you can see, stock dispersion is still at historically high levels:
* Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
*Past performance does not guarantee future results.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# The S&P SmallCap 600 is an index of small-cap stocks tracking a broad range of small-sized companies that meet specific liquidity and stability requirements.
^ IWM, QQQ, XLF, and RSP are used for illustrative purposes only.
+ Cornerstone owns APO, ARES, JPM, BX, and AXP in client portfolios.
@ Daniel Milan owns BX personally.
& The S&P MidCap 400 tracks 400 companies that broadly represent companies with midrange market capitalization.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.