'Still a lot of waves in this bull market', says Carson Group's Ryan Detrick

Key Concepts

• Small-Cap Stocks: Stocks of companies with a relatively small market capitalization. (Russell 2000 is used as a benchmark)
• Mid-Cap Stocks: Stocks of companies with a market capitalization between small and large-cap.
• Large-Cap Stocks: Stocks of companies with a large market capitalization. (Russell 1000 is used as a benchmark)
• Rotation: A shift in investment preference from one sector or asset class to another. In this case, a rotation into small and mid-caps.
• Relative Strength: A measure of a stock or sector’s performance compared to a benchmark. (Russell 2000 vs. Russell 1000)
• Market Breadth: The number of stocks participating in a market rally or decline. (Measured by Advance/Decline lines)
• Equal Weight S&P 500: An index where each stock in the S&P 500 has the same weighting, unlike the market-cap weighted standard S&P 500.
• Bull Market: A period of sustained increase in stock prices.
• Advance/Decline Line: A cumulative indicator that shows the net difference between the number of advancing and declining stocks.

Market Performance and the Rotation to Small & Mid-Caps

The discussion centers around the surprisingly strong performance of small-cap stocks at the beginning of the year, contrasting with previous instances of false starts. Ryan Detrick, Chief Market Strategist at Carson Group, acknowledges this positive start but remains cautiously optimistic, noting historical patterns of small-cap volatility. He emphasizes that while the initial performance is encouraging, confirmation is needed before fully committing to a small-cap strategy.

A key theme is the broader “rotation” occurring in the market – a shift in investment focus away from, not necessarily from, technology stocks and into other areas, including small and mid-cap stocks. Detrick highlights that market breadth, as indicated by all-time highs in Advance/Decline lines on the NYSE and S&P 500, supports the view of a healthy, global bull market. He states, “Market breadth leads price. This is still a healthy bull market and a global bull market.”

Confirmation Signals and Investment Strategy

The question of when to confidently invest in small-caps is addressed, drawing a parallel to the classic “Lucy and the football” scenario – a recurring pattern of initial promise followed by disappointment. Detrick suggests monitoring relative strength, specifically the performance of the Russell 2000 versus the Russell 1000. While some positive signals are emerging, he advocates for a diversified approach.

Carson Group currently maintains a slightly overweight position in large-cap stocks compared to small-cap, managing billions of dollars in real money. However, they do have small-cap exposure. Detrick surprisingly points to mid-cap stocks as an overlooked opportunity, noting they are hitting all-time highs and often correlate with the performance of the S&P 500 Equal Weight index. He suggests, “You can have different buckets here… own a little bit of everything is our take here.” The potential for further Federal Reserve rate cuts is also considered, with Detrick suggesting that additional cuts could further benefit small-cap exposure.

The Significance of Equal Weight and Mid-Caps

The conversation highlights the outperformance of the S&P 500 Equal Weight index compared to the traditional market-cap weighted S&P 500. As of the discussion, the Equal Weight index was up 0.5% while the S&P 500 was down 0.5%, representing a 1% outperformance. This outperformance was driven by 318 stocks rising on a particular Wednesday, despite the overall market being down, a result of underperformance in the technology sector.

Detrick connects this trend to mid-cap stocks, stating that they “tend to follow the equal weight.” This suggests that mid-caps could be a promising area for continued growth. He emphasizes that mid-caps are often overlooked, stating, “Nobody thinks about Peter or Jan Brady. They just kind of get lumped in the middle.”

Economic Outlook and Market Momentum

The discussion considers the scenario where the Federal Reserve does not implement further rate cuts this year, as predicted by JP Morgan. Detrick acknowledges that this would likely indicate a stronger economy but could also negatively impact the performance of small and mid-cap stocks.

However, he points to historical data suggesting that a strong start to the year generally foreshadows positive full-year returns. Specifically, he states that if the first five trading days of the year are higher, the market is up approximately 85% of the time for the entire year. Similarly, a positive January typically leads to positive returns for the remaining eleven months, with an 87% success rate. He concludes, “A good start to year likely means this momentum is real.”

Synthesis/Conclusion

The conversation presents a cautiously optimistic outlook for small and mid-cap stocks, driven by a broader market rotation and positive early-year performance. While acknowledging historical volatility in small-caps, Ryan Detrick emphasizes the importance of market breadth and the potential for continued gains, particularly in mid-caps and within the context of the S&P 500 Equal Weight index. A diversified investment strategy, coupled with monitoring key indicators like relative strength and economic conditions, is recommended. The strong start to the year serves as a positive signal, but confirmation and ongoing analysis are crucial for navigating the market effectively.