Market Sell-Off May Be an Asset to Value Stocks

The S&P 500 declined by 3.6% on Thursday, more than reversing Wednesday’s 3% rally. The drop was led by tech, tech-related, and consumer discretionary stocks. The Nasdaq, meanwhile, dropped by 5%.

The rise in yields weighed on more interest rate-sensitive growth stocks, and poor quarterly earnings from e-commerce companies made tech the worst performer within the growth sector.

Dave Sekera, chief U.S. market strategist for Morningstar, argued that the sell-off has left the U.S. stock market undervalued.

“Following this downturn, our measure of market valuation is now well into the undervalued territory,” wrote Sekera. “According to a composite of the stocks followed by Morningstar’s equity research analyst team, the broad U.S. equity market is now trading at a 12% discount to fair value.”

Sekera added that value stocks were better positioned than core or growth stocks at the start of the year, both of which were overvalued. The Morningstar U.S. Value Index declined 2.08% through the end of April, whereas the Morningstar U.S. Growth Index has dropped 25.9%. The Morningstar U.S. Core Index has fallen 12.09%. The value category trades at an 11% discount to fair value.

Value tends to benefit from rising real rates. UBS has noted that since 1975, value has outperformed growth across the cycle in periods when inflation is 3% or more. On Thursday, for example, U.S. value stocks outperformed U.S. growth stocks by one percentage point.

For investors who’ve been under-allocated to value and want to add to their long-term positions, Avantis Investors has a suite of actively managed value ETFs, including the Avantis U.S. Small Cap Value ETF (AVUV), the Avantis International Equity ETF (AVDE), the Avantis International Small Cap Value ETF (AVDV), the Avantis U.S. Large Cap Value ETF (AVLV), and the Avantis U.S. Equity ETF (AVUS).

AVUV is an actively managed ETF that seeks long-term capital appreciation by investing primarily in U.S. small-cap companies. It is designed to increase expected returns by focusing on firms trading at what are believed to be low valuations with higher profitability ratios.

Meanwhile, AVDE identifies securities with expected high returns based on market prices and other company information. The fund primarily invests in a diverse group of companies of all market capitalizations across non-U.S. developed market countries, sectors, and industries, emphasizing investment in companies believed to have higher expected returns.

AVDV mainly invests in a broad group of non-U.S. small-cap value companies believed to have higher expected returns across developed market countries, sectors, and industries. AVLV invests in a range of U.S. large-cap companies and seeks companies that are trading at low valuations with higher profitability ratios. AVUS invests primarily in a diverse group of U.S. companies of all market capitalizations, across sectors and industries, emphasizing investment in companies believed to have higher expected returns.

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