Are American value stocks, which have become junk stocks, not far from bottoming out and reversing?

US value stocks have recently been as unattractive to investors as junk stocks, but market analysis shows that they may be about to hit bottom and rebound.

Tracking the pioneer S&P 500 Value Index Fund ETF (VOOV) of low P/E ratio stocks in the S&P 500 Index, the increase since the beginning of this year is only 5%, which is significantly lower compared to the overall 15% increase in the S&P 500 Index. Although these value stocks are generally considered reasonably priced or undervalued, their performance in the stock market has not even reached the level of the overall market.

In fact, this value fund has experienced several brief rebounds, but whenever the price reaches $180, it always faces a wave of selling. As of the time of writing, the price on Tuesday afternoon was $175.68.

Analysis suggests that the key value stock index has fallen to near the 200-day moving average, which historically is a clear rebound signal; the Federal Reserve is likely to start a rate-cutting cycle within the year, and the expectation of accelerated economic recovery in the US is also favorable for the rebound of value stocks.

22V Research analyst Dennis DeBusschere listed in the latest report the value stocks that are likely to rebound, including General Motors, United Airlines, American Airlines, Ford, Prudential, and MetLife.

Falling near the 200-day moving average, is a rebound signal appearing?

Currently, the stock price of VOOV is exceptionally low, only slightly higher than its 200-day moving average of $166, which is typically seen as a positive signal by the market.

According to FactSet data, unless major adverse events such as a pandemic or a series of rapid rate hikes starting in early 2022 by the Federal Reserve occur, investors typically buy when the stock price touches the 200-day moving average over the past 20 years or longer.

This pattern indicates that unless there is an unexpected severe negative impact on the market, VOOV is expected to find support near the current level.

Furthermore, VOOV is currently trading at around 15.8 times earnings, about 26% lower than the S&P 500 Index's 21.1 times. Over the past 10 years, based on FactSet data used by the media, the average discount of this value stock fund relative to the broader index is about 17%.

With the Fed rate cut imminent, is a rebound of value stocks expected?

It is worth noting that value stocks often belong to mature companies, whose profits are more influenced by changes in consumer and corporate demand rather than industry-specific factors, such as the banking sector. Therefore, the performance of value stocks is usually closely linked to the economic cycle, and in the case of slowing economic growth and high interest rates, these stocks may face greater downward pressure.

However, the current economy is facing a dilemma of slowing growth. The market generally expects that as inflation pressures ease, the Federal Reserve may cut rates to stimulate economic growth. However, this expectation is not set in stone, and the specific timing and extent of rate cuts still remain uncertain This uncertainty has brought continuous concerns: If economic growth continues to slow down while interest rates remain at a high level, this will constitute a double blow to value stocks.

Changes in economic expectations, as reflected through the bond market, may trigger drastic fluctuations in value stocks.

According to data from the St. Louis Fed, the current 2-year U.S. Treasury yield is about 0.3 percentage points higher than the 10-year yield, the largest inversion since the beginning of this year. This anomaly reflects investors' concerns that the Fed may maintain high short-term rates in the long term to combat inflation, which could suppress consumer and business demand for goods and services.

At the same time, long-term bond yields lower than short-term yields indicate market concerns that the Fed's current policy may lead to sustained economic weakness, thereby reducing long-term inflation expectations.

Analysts believe that once the Fed signals the first rate cut, the 2-year U.S. Treasury yield should decline, boosting market confidence in long-term economic growth, which will push up the 10-year U.S. Treasury yield. The situation of yield curve inversion will then improve, which is usually beneficial for the economy.

Powell recently stated that the Fed has made significant progress on inflation but would like to see more progress before having enough confidence to start cutting rates. Powell refused to provide any specific information on the timing of the Fed's first rate cut. Currently, the market is more inclined towards the first rate cut within the year in September.

22V Research analyst Dennis DeBusschere wrote in a report:

The yield curve is expected to steepen to support the rebound of value stocks