Value stocks are outperforming the broader market on a year-to-date basis, and in some cases, they’re doing so by wide margins.
Investors thinking they’re missing out on the 2022 value rally may want to think twice because some experts see more upside coming for inexpensive stocks, and that could be good news for the related exchange traded funds, including the Invesco S&P 500 Pure Value ETF (RPV). Importantly, value stocks are still cheap.
“Valuation metrics also make value’s leadership look sustainable for 2022. Value stocks have been consistently cheap this cycle, relative to history. Even after the recent correction, the S&P 500’s least-expensive quartile trades at a historically extreme discount to its median stock, based on forward earnings yield,” says Denise Chisolm, Fidelity director of quantitative market strategy.
To its credit, RPV is proving remarkably durable this year. The Invesco fund is higher by almost 5% as of March 18, while the S&P 500 is down 6.41%. Indicating that RPV’s pure value approach is paying off for investors, the ETF is topping the S&P 500 Value Index by more than 770 basis points.
RPV, which tracks the S&P 500® Pure Value Index, could be poised for more upside in 2022 because history suggests that when value equities are as inexpensive as they are today, price appreciation often follows.
“Value stocks have outperformed the market more than two-thirds of the time from comparable relative valuations in the past, with average outperformance of 12%,” adds Chisolm.
There’s another reason that RPV could continue its winning ways as 2022 unfolds. While some investors may think that the Federal Reserve’s rate tightening, which arrived last Wednesday in the form of a quarter point hike, is a drag on value stocks, as Fidelity’s Chisolm points out, that’s not always the case.
“Investors who worry about the impact rate increases will have on stocks may want to look to value for protection. Value factors across the board have tended to outperform the market following Fed rate hikes,” Chisolm says. “The likely reason: Rate increases usually reflect strong economic growth, which can improve the prospects of beaten-down companies with improving earnings.”
To the point about rate hikes, RPV allocates about 40% of its weight to financial services and energy stocks, and those sectors often perform well when rates rise. The fund allocates over 21% of its weight to healthcare and consumer staples names — groups that are mostly rate neutral.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
