Rotating Regimes – What To Plan For In 2023

In general, the 2022 US Stock Market was a conflagration that wiped out almost everything in its path with the exception of a few industries and ETFs.  Nevertheless, there were definite rotations in leadership during weeks, months and quarters throughout the year.  

A group of people standing around a table outsideDescription automatically generated with low confidence

The ETF reports on ValuEngine for ETFs that follow market benchmarks provide a side benefit in writing market analyses.  They are a window to implicit forecasts for 3-, 6- and 12-month forecasts VE models are making for each benchmark’s ETF portfolio.  This is because the ratings and projections combine bottom-up constituent analysis with analyses of the historical price movements of the ETF in different market environments.   This empowers us to provide both looks back and share our model’s views on that which lies ahead. 

The benchmark indexes and ETFs analyzed here are:

  1. The S&P 500 Index representing US Large Cap, the ETF is iShares’ SPY;
  2. The S&P 400 MidCap Index representing US MidCap; the ETF is SPDR’s MDY;
  3. The Russell 2000 Index representing US Small Cap; the ETF is iShares’ IWM
  4. The Russell 1000 Large Cap Growth Index; the ETF is iShares’ IWF;
  5. The Russell 1000 Large Cap Value Index; the ETF is iShares’ IWD;
  6. The Nasdaq-100, constructed as an index using the top 100 non-financial stocks with primary listing on the Nasdaq, but now regarded as the premier US Big Tech Index; the ETF is Invesco QQQ.

All historical data are as of 12/31/2022.

 

IWD

IWF

IWM

MDY

QQQ

SPY

Market Index Being Tracked

Russell Large Cap Value

Russell Large Cap Growth

Russell 2000 Small Cap

S&P Midcap

Nasdaq 100

S&P 500

ValuEngine Rating

2

4

4

2

4

3

Forecast 3-mo. Price Return

1.32%

1.55%

0.9%

1.03%

1.25%

1.48%

Forecast 6-Mo. Price

4.01%

4.56%

2.27%

2.91%

4.36%

4.40%

Forecast 1-yr. Price Return

-1.26%

0.63%

0.19%

-0.73%

0.07%

-0.33%

Historic 1 mo. Price Return

-4.62%

-7.90%

-6.94%

-5.89%

-9.01%

-6.19%

Historic 3 mo. Price Return

11.52%

1.83%

5.72%

10.24%

-0.12%

7.07%

Historic 6 mo. Price Return

4.61%

-2.04%

2.95%

 

7.09%

-4.59%

1.37%

2022 Calendar Price Return

-9.72%

-30.25%

-21.79%

-14.37%

-32.58%

-19.68%

Historic 5-Yr Ann. Price Return

5.13%

11.06%

3.97%

6.15%

12.09%

8.61%

Volatility

19.38%

20.94%

24.07%

22.62%

21.93%

18.94%

Sharpe Ratio

0.20

0.44

0.11

0.22

0.49

0.38

Beta

0.98

1.07

1.16

1.13

1.10

1.01

# of Stocks

853

513

1948

401

100

503

Undervalued by VE %

41%

45%

69%

45%

41%

32%

P/B Ratio

2.5

9.8

2.1

2.4

6.6

4.0

P/E Ratio

16.3

27.5

27.9

14.1

25.3

19.8

Div. Yield

2.1%

0.9%

1.4%

1.4%

0.8%

1.6%

Expense Ratio

0.18%

0.18%

0.19%

0.22%

0.20%

0.09%

Largest Holding Pct.

Exxon Mobil Corp (XOM)

2.44%

VE3

 

Apple (AAPL) 11.27% VE3

Crocs Inc (CROX)

0.32%,

VE1

Fair Isaac Inc (FICO),

1.28%, VE4

Microsoft (MSFT)

11.95% VE3

Apple (AAPL)

5.98%

VE3

Index Provider

FTSE Russell Indices

FTSE Russell Indices

FTSE Russell Indices

S&P Dow Jones

Nasdaq

S&P Dow Jones

ETF Sponsor

 iShares by Blackrock

 iShares by Blackrock

 iShares by Blackrock

SPDRs by SSgA

Invesco

SPDRs by SSgA

 

 

The 6-month return represents the second half of 2022.  Comparing it to the entire year on the line below and/or our July column showing little differentiation during the carnage of the first six months, it is evident that some segments ended 2022 much better than others.  In particular, the Russell 1000 Value ETF, IWD, and MDY, the MidCap ETF both finished robustly in positive territory while the Russell growth stock ETF, IWF and QQQ, the Nasdaq-100 ETF continued to be punished.  Somewhat surprisingly SPY, the S&P 500 Trust, finished in positive territory, albeit barely. Rounding out the field, IWM, the ETF for the small cap 2000, recouped nearly 3% of its first half losses. Altogether, for the year, there were varying degrees of carnage. 

Rounding off the numbers:

IWD    Russell Value          down 10%

MDY   S&P MidCap           down 15%

SPY   S&P 500:                 down 20%

IWM   Russell Small Cap   down 20%

QQQ  Nasdaq                   down 30%

IWF    Russell Growth        down 30%.

For the year ahead, ValuEngine’s predictive model substantially flips this order on its head.  IWM, IWF and QQQ all receive numerical ratings of 4 (Buy).  SPY receives its normal rating of 3 (Hold) and IWD and MDY are rated 2 (Sell). The last two, in particular, surprised your author.  Most strategists still predict value and midcap to outperform.  Part of the reason could be mean reversion, one of many factors in the model.  It may consider these two ETFs somewhat overbought. Another factor in my surprise is that both IWD and MDY still have very attractive traditional valuation ratios.  Our valuation model even disagrees with that. Surprisingly, a higher percentage of growth stocks are categorized as undervalued than value stocks, a phenomenon I’ve seen very rarely.  MDY, less surprisingly, is in the middle of the pack for valuation. 

Of the three buy recommendations, IWF (Growth) and IWM (Small Cap) seem the most compelling.  IWF has the highest forecast returns of all the ETFs in the sample. IWM easily contains the highest percentage of undervalued stocks. 

Since we observed return differentiation among the benchmark indexes and prior columns here which observed distinct differentiation between winning and losing industry sectors in the market, we quickly look at the returns of the 11 Select Sector SPDR ETFs:

   

2022

VE

% Under-

Sector

Tickers

PR Returns

Dividend Yield

Rating

Valued

Energy

XLE

64.29%

2.9%

2

32%

Utilities

XLU

1.47%

2.9%

5

10%

Consumer Staples

XLP

-0.80%

2.4%

4

9%

Health Care

XLV

-2.04%

1.5%

4

23%

Industrial

XLI

-5.55%

1.5%

3

14%

Financial

XLF

-10.56%

1.9%

2

0%

Materials

XLB

-12.32%

2.0%

2

7%

Real Estate (REIT)

XLRE

-26.21%

3.0%

1

53%

Technology

XLK

-27.71%

1.0%

3

37%

Consumer Discretionary

XLY

-36.25%

0.9%

3

21%

Communication Services

XLC

-37.64%

1.3%

1

58%

 

The utter dominance of the energy sector in 2022 is legendary.  XLE, representing the Energy Select Sector SPDR, has a 60+% gain.  Among the other 10 ETFs, only the Utilities SPDR, XLU, managed to eke out a superior return.  The top six sectors outperformed the S&P 500 in 2022 while the bottom five all underperformed the bellwether.

Looking forward, our predictive model spans the range of possible ratings from 5 (Strong Buy) to 1 (Strong Sell).  XLU, representing Utilities, is the lone 5-rated Sector ETF while two ETFs, XLRE, Real Estate, and XLC, Communications, are rated as Strong Sells.  Altogether, the second-, third-, and fourth-best performing Sector ETFs in 2022 are rated as buy candidates for 2023.  In addition to top-tier-rated XLU, Consumer Staples (XLP) and Health Care (XLV) receive recommendations of 4 (Buy). 

For those more interested in analyzing stocks than ETFs, ValuEngine’s top-ranked US-domiciled large cap stock in each of the highest ranked sectors are as follows:

Utilities: Entergy (ETR) with a rating of 4 (Buy) and a dividend yield of 4.0%.

Consumer Staples: Archer-Daniels (ADM), rated 4 and a dividend yield of 1.9%.

Health Care: Cardinal Health (CAH) rated 4 and a dividend yield of 2.6%.

As usual, ValuEngine ratings are intended solely for informational purposes to be used in conjunction with other source materials.

Overall, our models see this year’s stock market as having potential for opportunity but in the aggregate, looks for flat-to-slightly positive price returns.  One somewhat likely scenario is that we will continue to see sector, style and cap-size regimes take periodic turns in assuming leadership, then falling out of favor.  During tumultuous times, owning low-volatility sector ETFs can mitigate losses. The three recommended sector ETFs have annualized volatilities of between 15% and 16.5%, far lower than the 19% of the S&P 500 or the 39% annualized volatility of the energy sector.  At the other extreme, staying out of the market altogether during inflationary times means locking in certain annualized losses in purchasing power.  In the middle, XLU, XLP and XLV are all ETFs that are timely now and should hold up relatively well during steep declines.   


More By This Author:

Appreciating The Passing Of A Titan & Incorporating Alternative Data Signals
A Materials World?
Will Aerospace And Defense Stocks Continue To Flourish?

Disclaimer: Always read the fact sheets and/or summary prospectus before buying any ETF.  Do your own research. Past performance may not be indicative of future results.

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