ValuEngine Says Sell in May and Go Away


A common toast has been: “May 2022 be better than 2021!”  However, where the US Stock Market is concerned, most of us would gratefully accept a repeat of 2021’s returns.

The ETF reports on for funds that follow market benchmarks provide a side benefit in writing market analyses.  They are a window to implicit forecasts for 1-, 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.  We can use all of this to try to look forward into 2022.

The benchmark indexes and ETFs chosen for this feature are:

  1. The S&P 500 Index representing US Large Cap, the ETF is iShares’ IVV;
  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.

Today’s focus is primarily on the 12-month period that will end on December 31, 2022.  On the chart below that is listed as the ValuEngine forecast for 1-year, indicating the next 12 months.  The data in the summary table are all from December 30, 2021, the last trading date of the year that just finished.

Market Index Being Tracked S&P Midcap Russell 2000 Small Cap Russell Large Cap Growth Russell Large Cap Value Nasdaq 100  S&P 500
ValuEngine Rating 3 4 4 2 4 3
VE Forecast 3-mo. Price Return 0.1% 0.4% 1.5% 0.4% 1.5% 1.0%
VE Forecast 6-Mo. Price Return 0.6% 1.1% 3.6% 1.4% 3.5% 2.6%
VE Forecast 1-yr. Price Return -5.2% -2.9% -2.2% -6.2% -2.0% -4.3%
Historic 3 mo. Price Return 7.7% 1.7% 11.5% 7.3% 11.1% 10.7%
Historic 6 mo. Price Return 5.4% -3.0% 12.6% 5.9% 12.3% 11.0%
Historic 1-Yr. Price Return 23.3% 13.5% 26.7% 22.8% 26.8% 27.1%
Historic 5-Yr Ann. Price Return 10.2% 10.1% 21.2% 7.3% 24.2% 14.5%
Volatility 19.6% 21.1% 16.4% 16.9% 17.0% 15.5%
Sharpe Ratio (3-Year) 0.52 0.48 1.29 0.44 1.42 0.94
Beta 1.19 1.22 1.02 1.04 1.02 1.00
# of Stocks 400 2038 503 854 100 500
Undervalued by VE %* 50% 66% 45% 45% 35% 35%
P/B Ratio 2.8x 2.8x 14.4x 2.7x 9.3x 4.8x
P/E Ratio 24.4x 183.2x 39.8x 21.5x 34.1x 27.0
Div. Yield 1.0% 0.9% 0.5% 1.6% 0.4% 1.2%
Expense Ratio 0.23% 0.19% 0.19% 0.19% 0.20% 0.03%
Index Provider S&P Dow Jones FTSE Russell Indices FTSE Russell Indices FTSE Russell Indices Nasdaq S&P Dow Jones


Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting
ETF Sponsor SPDRs by SSgA iShares by Blackrock iShares by Blackrock iShares by Blackrock Invesco iShares by Blackrock

In order to frame our forecasts, let’s look at the ValuEngine rankings that summarize our models’ views on the expected price appreciation of IVV. This is an ETF built to replicate performance of the S&P 500 Index which is the most common benchmark for active management and the focus of most market forecasts.  IVV has a rating of 3 thus predicting average performance among the ETFs in our universe during the next six months.  Given its bellwether status as the market’s proxy, a rating of 3 is the norm for IVV.  The ValuEngine market forecasts for IVV – and thus the S&P 500 – will vary from negative to positive depending on our models’ assessments of the current environment.

Focusing on the S&P 500 column in the four rows containing our forecasts, our models expect the market to navigate the next three-to-six months in modestly positive territory.  However, with a 12-month forecast of -4%, even a six-month 3% gain, our models forecast a mild correction during the second half of 2022.

Are there segments of the market for which the ValuEngine models have a more positive outlook?  There are differences but not very sizable ones.  QQQ, still rated 4 (Buy), gets out least negative price forecast; we predict a dip of just 2%.  IWD, rated 2 (sell), has the lowest prediction for calendar year 2022 of -6%.  For those wondering how an ETF with a projected decline for 2022 can have a “buy” rating, it’s important to understand that ValuEngine ratings are assigned relatively.  Therefore, in this environment, “buy” should be thought of as “above average.”

The ValuEngine models currently favor growth over value with IWF, the ETF based on the Russell 1000 Growth Index rated 4 and expected to endure less than half the decline of IWD based upon the Russell 1000 Value Index.  The models predict one reversal of historic trends.  Although IVV (large cap S&P 500 ETF) has outperformed IWM, (small cap Russell 2000 ETF) consistently and decisively during the past 5 years, IWM now receives an above average rating of 4.  IWM’s largest position is AMC Entertainment, which is also rated 4 (buy).  Additionally, we rate 66% of IWM’s holdings as undervalued, the only one of the six benchmark index ETFs that doesn’t have 50% or more of its holdings rated as overvalued.

Thus, the answer to the perennial question appears to be yes.  No matter which of the major six benchmark categories you choose, our models say you are likely to enjoy positive returns during the first half of the year but if you continue to hold a benchmark index-based ETF for the rest of 2022, you will give back all the gains and lose a bit more.   ValuEngine’s model predictions are fallible as most predictions tend to be.  The models’ projections have tended to predict the direction of the trends more than they’ve been incorrect.  Magnitudes can be more difficult.  In this blog entry that was posted at the end of September, we projected a week positive return for most of the benchmark indexes averaging about +1.5%.  They were indeed positive but the magnitude was correct only for small cap IWM.  The other five benchmark index ETFs fourth quarter price returns ranged from 7.3% for Large Cap Value IWD to 11.5% for Large Cap Growth IWF with the S&P 500 ETF, IVV, between the two with 10.7%.

I’ve seen several well-known strategists, including the venerable Byron Wein, also project a decline or correction of the S&P 500 between -2% and -15%.  That may portend that our forecast will turn out to be accurate, but it could just turn out that misery loves company.  The next question is to determine where investors who lower their exposures to one or more of these six benchmark index categories should re-allocate their dollars.  That will be the subject of our next blog.

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