November's Market Surge: The Story of Small-Cap and Value Stocks

November 2024 was an extraordinary month for the stock market, with small-cap and value stocks leading the rally. As investors looked to capitalize on post-election optimism and favorable market dynamics, these often-overlooked sectors surged, offering attractive opportunities for investors.

Throughout November, small-cap stocks remained attractive, trading at a 14% discount to fair value, while mid-cap stocks were near fair value at a 2% discount. Large-cap stocks, however, were at a 3% premium. Morningstar highlighted the importance of positioning in this environment, advocating for investors to overweight undervalued or fairly valued areas and underweight overvalued ones. This strategic approach allowed investors to take advantage of the market's upswing while managing risk.

A closer look at the performance of small-cap and value stocks during November reveals several key factors driving their outperformance. Tailwinds, such as moderating inflation, declining long-term interest rates, and Fed easing, benefited smaller companies more, leading to their strong performance. Additionally, these sectors' sensitivity to economic cycles and higher beta made them more responsive to positive economic news.

Historically, small-cap stocks have been more volatile but have also offered higher returns over the long term. Despite their recent outperformance, small-cap stocks have been more attractive only 20% of the time since 2010, while value stocks have been near fair value or a discount 80% of the time. This suggests that November 2024 may have been an opportune time to overweight small-cap and value stocks in a portfolio.



Investors looking to capitalize on the performance of small-cap and value stocks in November 2024 could have employed several strategies. Bottom-up stock-picking allowed investors to identify undervalued small-cap companies with strong fundamentals and growth potential. Index-based investing provided broad exposure to these sectors through ETFs like iShares Russell 2000 Value ETF (IWN) or Vanguard Small-Cap Value ETF (VBR). Sector-specific exposure to energy stocks, which had favorable tailwinds, could also have been beneficial. Lastly, dollar-cost averaging helped investors take advantage of market fluctuations and minimize the impact of volatility.

Geopolitical tensions, such as US-China trade disputes and Middle East unrest, also played a role in the energy sector's positive performance. As energy demand rose, so did supply concerns, leading to a 14% increase in the iShares US Energy ETF (IEnergy) during the month. This dynamic, coupled with moderating inflation and declining long-term interest rates, contributed to the energy sector's robust performance in November 2024.

November 2024 was a month to remember for the stock market, with small-cap and value stocks leading the rally. By understanding the factors driving their outperformance and employing strategic investment strategies, investors could have capitalized on the market's upswing while managing risk. As the market continues to evolve, investors should remain attentive to these often-overlooked sectors, as they may offer attractive opportunities in the future.