Prices Down, Value Up

Mike Zaccardi

EVERY MARKET DECLINE is different, but all of them can feel unnerving, even for the most steadfast of investors. Spooked by 2022’s financial market turmoil? There’s good news: Stock and bond values today look much more compelling than at the turn of the year.

Thanks to 2022’s 14% drop, the S&P 500 now trades below its five-year average price-to-earnings (P/E) ratio, based on expected profits. On top of that, corporate earnings rose impressively in this year’s first quarter. Stock-pickers might be enticed by inexpensive value companies, as well as by so-called GARP—or growth at a reasonable price—stocks.

What about P/E ratios in other market niches? No two ways about it, U.S. small- and mid-cap stock valuations are cheap. Venture overseas and you’ll also find attractively priced companies.

While the year-to-date S&P 500 decline is nothing to scoff at, a 14% drop is pretty typical for market pullbacks in each year since 1980, according to Ryan Detrick at LPL Research. Detrick’s analysis also highlights that midterm election years tend to be particularly volatile for stocks. In such years, the S&P 500 usually doesn’t bottom until well into the third quarter—but returns from there are often stellar.

Still, logging onto your brokerage account this past weekend was no fun, and that goes for both stock and bond investors. The U.S. aggregate bond market is down more than 11% from its August 2020 peak. That 21-month drawdown is the sharpest since 1980. Couple a rough bond market with significant stock losses, and the Vanguard Balanced Index Fund (symbol: VBIAX), down 12.2% in 2022, has never had a worse start to a year.

Retirees might be particularly nervous since they probably haven’t endured such negative returns from both stocks and bonds. The good news: Bond yields now look decent. I urge readers with significant bond exposure not to bail out. The yield on the broad U.S. bond market is up to 3.35%. That’s higher than the expected 10-year inflation rate. At 4.19%, high-quality corporate bonds are near their highest yield in a decade.

In early 2021, euphoria was rampant. Today, bullish sentiment is near record lows. But that’s another reason to be optimistic. Historically, when others are fearful, that’s often been the time to get a little greedy.

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