As the stock market approaches record highs, the risks are even higher for investors. Great Hill Capital Chairman Thomas Hayes joins Yahoo Finance Live to weigh in on what investors should be looking at.

Hayes advises investors to focus on relative value, favoring small and mid-cap stocks. Despite large-cap stocks making up a hefty sum of indexes, there are expectations for companies to perform less than stellar as compared to 2023.

Hayes notes these companies will do "okay," predicting a “stock picker's market” regardless of political pressures associated with the 2024 presidential election and Congressional gridlock.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

BRIAN SOZZI: So what's the best strategy? Somebody watching this, they're seeing a market trade are record highs, do you pour more money into NVIDIA, even though it's up what, 237% year and trading at record valuations? Or do you sniff around some of these doggie health care stocks that have had terrible years this year?

THOMAS HAYES: I think the latter. I think you want to look at relative value. Large cap is trading at about 20 times forward, maybe now a little bit more than 20 times forward. Small and mid-cap are trading around 14 times forward. So that's where you're going to find the real value and the real opportunity.

So I do think that if you look at presidential years, the average since 1928 is about 11.28%. With a sitting president running for re-election, it's about 13% So those companies that make up the heaviest weights will probably do OK, but much less well than they did in 2023.

So I think you've got to look under the surface, and I do think there's going to be tremendous amount of money made under the surface, even if the general indices are only up high single digits, low double digits in 2024.

BRAD SMITH: You mentioned going into presidential election, general election year. What amid a what is anticipated to be a vitriolic campaign season that we're going to see next year? What could spook the markets? Is there anything that could throw us off course, especially given some of the concerns that we've seen geopolitically, or even where the Fed is going to perhaps have its own turnover as well going into next year and where camps line up there?

THOMAS HAYES: Yeah. There's always something. I mean, we do have the geopolitical risk. We do have the Fed risk I mean you've got a wide spread between the Fed anticipating three cuts in the dot plot and the market anticipating six cuts. That the Fed is still highly restrictive right now.

If you consider where the Fed funds rate is relative to core inflation you've got about 200 basis points of restriction. So they're going to have to close that gap. Maybe if we do see a little bit in oil that will help keep inflation a little bit above trend, and then they bring down rates modestly, that'll get us to a more accommodative state.

But really, it's going to be a stock picker's market. And I think the real risk for the markets generally is not politics. If one party wins the executive, Congress, and the Senate, that's when you tend to get underperformance. As long as you have some form of blocking and gridlock, that's very, very positive for equity.