July offered investors a slight reprieve from the market volatility that has characterized the first half of 2022. Although most major equity indexes remain down more than 10% since January, investors got a brief taste of a midsummer “buy the dip” rally to kick off the third quarter. U.S. economic data remains surprisingly robust, encouraging investors that a soft landing from late-cycle recession fears may be possible. However, the highest inflation rates in decades remain an albatross for the Federal Reserve.
Though the risk-on rally did little to quell losses from earlier this year, if July’s bull market is any indication of forthcoming tranquility, it will be important to analyze potential opportunities before they may disappear.
U.S. mid-cap and mid-cap value are two areas that should not be overlooked.
Valuations May Regain Upside
This year’s volatility has compressed the peak valuations from late 2021, making most asset classes relatively more affordable across various metrics. Mid-caps are no exception.
The Russell Midcap and Russell Midcap Value indexes have seen their price-to-earnings (P/E) and forward P/E values (both excluding negative earners) retrace substantially by mid-summertime, both recently hovering around a 10% to 12% discount to their long-term averages. Despite July’s rally, these are still among the steepest discounts observed for these asset classes dating back to 2002.
Even the Russell Midcap Growth Index has returned to more modest valuations, trading right around its long-term average for both measures.