How to Play US Equities at Current Valuations


• While US equities approach their near pre-crisis all-time highs, the recovery has been concentrated, creating relative value opportunities in specific exposures.
• Without a health solution in place, stable dividends and selective value may help investors access the relative value story, while lingering uncertainty in equity price sensitivity may favour a low volatility approach.

• SPDR ETFs tracking the Dividends Aristocrats, Low Volatility and Value Exposure Select indices offer a compelling opportunity for investors seeking to remain in (or reinitiate) long positions.
Global equities had experienced a significant drawdown in 2020, related to the global pandemic and the associated economic shutdown. However, last week US equities (S&P 500) pulled within 2.5% of their pre-crisis all-time high (SPX 3394.73, on 19 February 2020).1

No doubt this recovery is encouraging for US equity investors, especially as it comes during a Q2 earnings season that was meant to show the extreme negative impacts of the global COVID-19 pandemic on US corporations. Despite the encouragement, there are some notable features of the recovery and lingering uncertainties, which are preventing a full return to ‘risk-on’ and keeping large stockpiles of cash holdings on the sidelines, across all investor segments.

Since the S&P 500 bottomed on 23 March 2020 (SPX 2247.64) the index has rallied 47% as of 22 July 2020, recovering nearly all the ground lost at the end of Q1. However, this recovery has been largely concentrated with the 5 largest stocks (Apple, Microsoft, Amazon, Facebook and Alphabet) contributing nearly a quarter (c. 24%) of the recovery. Furthermore, nearly half (c. 48%) of the recovery has come from the top 2 sectors (Technology and Health Care) plus Amazon.2  While this has benefitted index investors – and readers of the SPDR Sector Compass – it has left a large part of the US equity market ripe for valuation opportunities as benefits from the recovery expand beyond these sectors.

Investors also remain cautiously optimistic about the prospect of US equities to sustain, or break through, the previous all-time high. We know this because cash holdings remain at historically high levels among institutional real money investors. Clearly investors believe that a sustained, broad-based economic recovery will not be possible until a health solution to the COVID-19 pandemic is on the horizon.

The relative opportunities for investors in US equities at the current valuations may be in three places.

• First, investors may benefit from a stable dividend strategy such as Dividend Aristocrats, which in addition to a sizable yield is currently offering investors significant value exposure (see Figure 1). Many companies were forced to slash dividends amidst the COVID-19 pandemic, but our Dividend Aristocrats index has only need to remove 4 stocks this year as a result of dividend suspensions.

• Second, investors can also play pure value selectively through our Exposure Select Index, which uses a light quality touch to avoid value traps. This index also offers a relatively attractive yield exposure (Figure 1), so investors can get paid to wait.

• Third, for the most cautious long investors, a Low Volatility approach may offer the most aggressive positioning against negative impacts of the lingering uncertainty.

How to play these themes

In one simple trade, investors can access any of these themes using our SPDR ETFs. The SPDR S&P U.S. Dividend Aristocrats UCITS ETF offers investors stable dividend stocks at a relatively attractive valuation. The SPDR MSCI USA Value UCITS ETF offers an opportunity to play value selectively and the SPDR S&P 500 Low Volatility UCITS ETF offers investors a chance to lower portfolio risk by targeting the least volatile S&P 500 stocks. To learn more about these funds, and to view full performance histories, please follow the links below.

SPDR S&P U.S. Dividend Aristocrats UCITS ETF
SPDR S&P 500 Low Volatility UCITS ETF

Figure 1: Current FaCS Active Exposure Comparison (vs. S&P 500 Index)

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