Good Riddance to the First Half of 2022: What next?

There was a hilarious commercial at the end of 2020 where the year, portrayed by Kristen Bell, became a perfect match for Satan. This is exactly how many equity investors felt about the first half of 2022.  

2020 turned out to be a good year for the market as the government stepped in with huge infusions of cash into the economy.  However, many market analysts feel that the side effects of keeping the economy and the market humming have come back to create many of the problems the market and the economy are experiencing in 2022. This is exactly how many equity investors felt about the first half of 2022.  From an investment perspective, Kristen Bell’s year should probably say 2022 in the picture.

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Seemingly, everything that could go wrong did go wrong.  The laundry list includes unexpected and relentless spikes in inflation; a reactive Fed determined to raise interest rates until it feels inflation is under control; global unrest and uncertainty over Russia’s war on the Ukraine; and unexpectedly bad retail sales and GDP numbers in Q1 triggering fears that the Q2 number when released will confirm a recession that could last for years.

The tech-heavy S&P 500 Index was down more than 20% and the even-more tech heavy Nasdaq was down more than 30%.  Many stocks that had led the 10-year surge in the markets also led the steep decline. Our quarterly review also looks at benchmark index ETFs for midcap, small cap, growth, and value. 

The benchmark indexes and ETFs we use are:

  1. The S&P 500 Index representing US Large Cap, the ETF is the Vanguard S&P 500 ETF, VOO;
  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 six benchmark index ETFs are down substantially as shown here.  For reference, the last two columns compare the data for VOO as of July 1, 2022, with VOO as of December 31, 2021. The differences are striking.

Current ValuEngine reports on these ETF’s can be viewed HERE
220712 Blog first table etf comparisons
Current ValuEngine reports on these ETF’s can be viewed HERE


  1. The rightmost two columns tell quite a tale.  In just six-months, the five-year annualized return of VOO dropped more than 550 basis points or about 60% on a ratio basis. Interestingly, the current value of 8.9% is much more in-line with the 50-year average annualized return of about 8% for the S&P 500 Index.  The five-year Sharpe ratio of 0.52 is on-target with the average 5-year Sharpe ratio of 0.50 for the S&P 500 since 1982 (as far back as I have Sharpe Ratios available).  The valuation ratios, price-to-book and price-to-earnings are down and the dividend yield is up.  So the market now looks more attractive on a valuation basis than it did in December even though those numbers are still higher than historical levels.  VOO is rated as a 4 (buy) by the ValuEngine models.  This is a rarity implying that the market itself is more attractive than the majority of equity ETFs covered by ValuEngine.
  2. End-of-year data for the five other benchmark index ETFs may be found on the ValuEngine site by using this link. The reduction in P/E and P/B ratios for midcap stock as represented by MDY and large cap value as represented by IWD have taken these two ETFs back down toward average historical levels.  While not yet up to its historical average yields, the 2.0% is beginning to look attractive. Its volatility is the lowest among the six benchmark indexes.  
  3. Another way we look at attractiveness from a value perspective is by the percentage of portfolio holdings rated as undervalued by our models. All of the benchmark indexes have 62% or more of their holdings classified as undervalued with IWM holding the Russell 2000 having the highest percentage. Almost 80% of its stocks are considered undervalued.  
  4. The 5-year historical returns were hammered for all the indexes as well, with IWD suffering the least damage and QQQ taking the worst pummeling.  The midcap and small cap segments went from well above their average levels for five-year annualized returns to considerably below those levels.  Taken altogether, midcap and small cap stock index ETFs are now undervalued from a historical perspective.  
  5. The ValuEngine forecasts are mixed but moderately positive until year end, then showing more negative turbulence beginning in January.  Unfortunately, the predicted percentage changes are very similar to the ill-fated predictions available for viewing in the earlier link.  Like most quantitative models, ValuEngine’s did not anticipate the sharp inflection point in the market that plummeted stock prices.  Therefore the forecasts must be taken with a grain of salt until the market has become more stabilized. 
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What’s Next for investors? 

As discussed in last week’s blog, many industry colleagues and financial advisors spend a major portion of their time trying to explain that pulling money out of the markets altogether following a 20% decline is a very bad idea. It is important to grasp that the “safety” of keeping that money in a savings account earning less than 0.1% as inflation persists at 7+% or more is not safe at all.  It is the equivalent of locking in a loss of 50% in real dollar terms within 5 years.  Even in a doom-and-gloom scenario where the bear market continues through the end of 2023 and the US GDP declines for four straight quarters, investors should not divest and go into cash.  Advisors should help clients understand that we’ve been through difficult cycles before, and the market has invariably healed and climbed higher.

The rest depends on whether an investor anticipates needing to access part of their nest eggs within the next 3 – 10 years or who have a life expectancy of less than 10 years.  People in this classification would be better off re-allocating no more than half their core equity positions to more conservative low volatility and high dividends rather than divesting.  Many of the previous columns of this blog focused exactly on that.  They are available in our archives and three in particular are dated Jan. 18March 13,  and May 18.  Despite our models’ optimism, this blog was aware of the changing seas as they began to occur with attention paid to the nest eggs in most peril of getting cracked significantly. 

Concisely, investors with time horizons beyond 10 years and little anticipated need to dip into their nest eggs for big-ticket-item expenses in that time period should stay the course.  Investors who have stayed the course so far but have little margin for error left may wish to invest in more conservative and high dividend funds with active managers to navigate sea changes.  Two that have held up relatively well so far this year and have positive returns with more than double the yield of VOO for the past 12 months include: DIVZ, the TrueShares Low Volatility Equity Income ETF; and SDEI, Sound Equity  Income Fund.

However, SDEI has less than the general threshold level of survival of $25 million assets under management so investors concerned about potential ETF closures should veer toward DIVZ.  A larger all-weather and low-cost index fund that many income-oriented investors use as an alternative core holding is the Schwab US Dividend Equity ETF, SCHD. Although it lost 4 times as much as DIVZ year-to-date, and its dividend yield is much lower than that of DIVZ, SCHD compares strongly in both key areas with most other mainstream core holdings. Currently, it boasts a strong dividend yield of 3.6%, approaching double that of the S&P 500, while its price decline was less than half as much as that suffered by the Vanguard S&P 500 ETF, VOO. 

Those more concerned with growing capital reserves than income and volatility, however, may wish to stick with VOO or a similar total market fund such as VTI.  When the S&P 500 does eventually rebound from its low, history says the recovery will be sudden and robust.  In such a market, SCHD and DIVZ will also generate much more positive returns than they did in the past 12 months but are unlikely to keep pace with VOO or VTI.  Most research studies confirm that it is close to impossible to outperform the S&P 500 on a systematic basis.  So since the strategists’ confirmation signs are almost invariably behind the recovery itself, by the time the rally is confirmed, more than half of it will likely be missed.  In fact, one technical blog I follow believes this is a bottom and just issued a table-pounding buy. Since many technicians promote their reputations as being contrarians, take that with a grain of salt but just know that not everybody believes that the bear will continue to 25% or worse. This is why I tell family members with more than 10 years to retirement and who do not follow the market that the best investment advice I have for you is two wads of cotton, one for each year. Just stay the course and ignore the noise.

This 52+ year graph from December 31, 1969 until today provides a vivid illustration of why the US stock market as represented by the S&P has been the best place to grow a nest egg for the past 100 years and perhaps more.  $100 invested at the end of 1969 had grown to more than $21,000 by the end of 2021.

220712 Blog S&P500 chart and table


Again, everything is determined by the expected need to access the money.  Someone with immediate life needs to access the money between June 2000 and September 2006, a 6-year and 3-month period would have had to incur a loss, lengthening the time of recovery.  Just one year later starting in September 2007, it was another 55 months or just over 4.5 years from peak to trough and back to peak.  If an investor needed current income, a growth fund might not produce enough dividend yield to address those needs.  More problematic still is if cash withdrawals were required.  The more taken out, the less recouped and by the time the upward slope of the investment’s curve continued, it might be too late to help the investor that needed to substantially reduce the amount remaining in the investment account.

This is why investors that need income streams or may need to access their money within the next 5 years should consider having no more than 50% of the core in US equity growth ETFs, whether indexed such as VOO and VTI or active such as DFUS, the Dimensional U.S. Equity ETF. Advisors for these investors may wish to investigate lower volatility and higher income options for the other 50% of the remainder of the equity allocation.  It is assumed for these investors that at least 50% of the overall nest egg is already allocated to assets that are relatively safe, liquid and income-oriented.

There is no guarantee that the future will emulate the past in terms of time it will take to recover the 20% lost in the first half of 2022 or how many more months, if any, it will take to see the bottom of this bear cycle.  The best one can do is carefully consider anticipated needs for each individual investor before determining whether to stay the course or reallocate some assets to more conservative options.  Once that decision is made, then the criteria for selecting other ETFs should help in making comparisons for eventual selection.     

By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
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