Mid-Cap Stocks Rebound in Q3, Led by Value and Interest Rate Sensitive Sectors
The Russell Midcap Index surged 9.21% in the third quarter, outpacing the 6.08% gain of the large-cap Russell 1000 Index and keeping pace with the 9.27% return of the small-cap Russell 2000 Index. Value stocks led the charge, with the Russell Midcap Value Index returning 10.08%, more than 350 basis points ahead of the Russell Midcap Growth Index.
Interest rate sensitive sectors such as utilities (+19.04%) and real estate (+16.33%) were among the top performers, driven by the Federal Reserve’s decision to cut interest rates. Industrials (+11.69%), financials (+11.41%), and consumer discretionary (+10.02%) also outperformed the broader index, while communication services (+7.79%), health care (+6.95%), materials (+6.94%), information technology (+4.53%), and consumer staples (3.78%) posted positive returns but lagged the index’s overall result. Energy (-1.69%) was the only sector to post negative returns.
The rotation away from large caps and towards small and mid-cap stocks was fueled by the Fed’s rate cuts and access to cheaper financing. This shift benefited the Strategy, which saw meaningful gains relative to its benchmark in the last eight weeks of the quarter.
However, economic deceleration continues to weigh on certain sectors, such as industrials and materials, which are expected to recover later than anticipated. Additionally, market uncertainty surrounding the U.S. presidential election and its policy and trade implications is increasing.
In this environment, conviction in high-quality companies with strong balance sheets and compelling idiosyncratic drivers is crucial. Several detractors came from the industrials and materials sectors, which have been impacted by customer destocking trends and declines in sales volumes. Atkore (ATKR) and Ashland (ASH) were among the largest detractors, while AppLovin (APP) and Avantor (AVTR) were top contributors.
The Strategy also initiated new positions in SBA Communications (SBAC), Tenet Healthcare, and exited positions in Five Below (FIVE), among others. Despite several difficult quarters, the improved relative performance in the third quarter suggests that the efforts to refine positioning and conviction in high-quality companies are paying off.
While a slowing economy and the U.S. presidential election will undoubtedly contribute to further uncertainty, adhering to a rigorous due diligence process and philosophy that companies with good business models, strong balance sheets, and positive long-term drivers will ultimately persevere through any kind of turbulence ahead.
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