Though New Year trading opened up to geopolitical tensions between the United States and Iran, Wall Street rebounded soon as investors shrugged off fears of a possible escalation in tensions. The S&P 500 is at a record high now. U.S.-China trade optimism, a dovish Fed, easing of Brexit uncertainty and dissipating global growth worries are also driving the market (read: S&P 500 Hits New Highs: ETFs Soaring to Start 2020).
Then, there is the January Effect. It is a seasonal increase in stock prices due largely to year-end tax considerations. Investors redeploy their capital to speculate on weaker performers in January after selling winners in December to create tax losses. This phenomenon pushes the stock market higher in the first month of the year (read: Top-Ranked ETFs & Stocks to Profit From the January Effect).
The U.S. economy is on a strong footing now with third-quarter GDP data coming in at 2.1%, better than analysts’ expectations. Other economic data points released lately have also been bullish. Consumer outlays increased 0.4% in November, its strongest gain since July. Industrial production increased at a seasonally adjusted rate of 1.1% in November compared to the prior month. This marked the biggest month-over-month increase since October 2017. Housing starts increased 3.2% sequentially in November.
Are Stocks Overvalued?
The S&P 500 had a stellar 2019, up almost 29%, marking its best annual performance since 2013. After the astounding gains, thoughts of a correction in the market or overvaluation concerns are justified (read: 10 Top-Performing ETFs of the Past Decade).
The S&P 500 Index is currently trading at 18.6 times forward earnings, according to FactSet data, above the average ratio of 16.7 during the past five years and 14.9 over the past 10, as quoted on MarktWatch.
How About High-beta ETFs?
Most Wall Street analysts predict moderate gains (about 5%) in U.S. equities in 2020 as stocks jumped 30% in 2019 even after earnings declined overall. Against this backdrop, high-beta ETFs are expected to gain handsomely. Beta is directly related to market movement. Notably, high-beta funds tend to rise or fall more than the stock market and are thus more volatile.
A beta that is greater than 1.0 is likely to be more volatile and gainful. When markets soar, high-beta funds experience larger gains than the broader market counterparts and thus outpace their rivals (read: 5 High-Beta ETFs to Buy on Trade Talk Hopes).
But investors who are worried about overvaluation might want to look for some value quotient in their investments. We highlight below a few ETFs that have a beta greater than 1.0, P/E (36 months) below 19.67 times of SPDR S&P 500 ETF Trust (SPY - Free Report) and three-months price gains of at least more than the S&P 500 (up 11.5%).
iShares Edge MSCI USA Value Factor ETF (VLUE - Free Report)
P/E: 12.41x; Beta: 1.12x; Zacks Rank #1 (Strong Buy); Three-Month Performance: 14.76%
Financial Select Sector SPDR Fund (XLF - Free Report)
P/E: 13.92x; Beta: 1.14x; Zacks Rank #2 (Buy); Three-Month Performance: 15.33%
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report)
P/E: 16.98x; Beta: 1.30x; Zacks Rank #2 (Buy); Three-Month Performance: 14.27%
Vanguard Russell 2000 ETF (VTWO - Free Report)
P/E: 18.50x; Beta: 1.16x; Zacks Rank #1; Three-Month Performance: 13.28%
SPDR Portfolio Total Stock Market ETF (SPTM - Free Report)
P/E: 19.58x; Beta: 1.02x; Zacks Rank #2; Three-Month Performance: 12.97%
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