May 26 2026 Reflections: Time to Lighten Up Exposures?
The current economic doldrums have most investors concerned about a potential market downturn. The bottom line concern many economists and consultants have expressed lately is stagflation, the dreaded combination of flat economic growth with inflation that gets higher and higher indefinitely. We may be approaching a time where that concern becomes so widely held that it gets reflected by the market. That worry is only compounded by the fact that we are now in the six-month period of the calendar year, typically marked by under-performance relative to the full year. The six months from October 1 through April 30 between 1926 and 2025 has averaged about 500 basis points more, reflecting a difference of about 7.3% to 2.3%, than the May – October period. This does not mean that investors should sell their S&P 500 stocks in May. In terms of frequency, the S&P 500 Index posts positive returns for the May-October period about two-thirds of the time but also under-performs the year’s S&P 500 return almost as frequently. Such trends are not repeated every year but certainly do nothing to dispel fears that the new economic realities for the USA will translate into a six-month-or more market downturn.
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During high inflation and economic stagnation, earnings growth rates tend to decline as sales rise less quickly than costs for most companies. Typically, the stock market struggles to tread water in the first six-to-12 months of such a period and often, albeit not always, decline into market correction territory or worse. When stagflation is anticipated, active asset managers tend to sell stocks in growth-oriented and economically sensitive sectors such as Consumer Discretionary, Industrial and Technology. The stocks to own typically include stocks in sectors such as Energy, Materials, REITs, Financials, Consumer Staples, Healthcare and Utilities. “Old economy” and “value” stocks often outperform because they hold real assets and can pass increased costs to consumers. The goal is to invest in sectors that thrive on higher prices, such as commodity producers.
From a quantitative perspective, such managers typically focus on avoiding or lightening positions in stocks with high valuations, especially high P/E ratios, high betas, and/or pay zero dividends as these are dependent on strong economic growth to justify high valuations. That said, the stocks of companies with declining economic growth are also high on the list of companies to be sold off. Therefore, VE ratings based on anticipated stock price growth are still relevant but with more of an emphasis of risk control than in a normal state environment.
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We start with a screen taking these factors in common and selecting stocks rated 4 (Buy) and 5 (Strong Buy). Using our valuation model, we eliminate all stocks in the most overvalued 50% in the valuation spectrum. We also eliminate stocks with a P/E ratio higher than 25. Then, we eliminate the stocks too sensitive to the market as measured by beta. In this case, we chose 1.25 as the cutoff, the theoretical level at which a stock is 25% more sensitive to economic changes than the S&P 500. For stability, we added one more requirement. The stock must pay a dividend and have a market capitalization of at least $5 billion.
The screen yielded the stocks of 26 companies as shown below.
| Ticker | Company Name | Industry Name | VE Rating | Valuation Rank | Forward P/E Ratio | Div Yld | Country |
| MUFG | MITSUBISHI-UFJ | BANKS FOREIGN | 5 | 62 | 10.9 | 2.1% | JPN |
| SCGLY | SOCIETE GENL FR | BANKS FOREIGN | 5 | 60 | 8.3 | 2.0% | FRA |
| EBKDY | ERSTE GROUP BNK | BANKS FOREIGN | 5 | 60 | 9.2 | 0.5% | AUT |
| MFG | MIZUHO FINL-ADR | BANKS FOREIGN | 5 | 58 | 11.8 | 1.6% | JPN |
| BCS | BARCLAY PLC-ADR | BANKS FOREIGN | 5 | 56 | 8.1 | 2.6% | GBR |
| BBVA | BANCO BILBAO VZ | BANKS FOREIGN | 5 | 52 | 8.9 | 5.2% | ESP |
| LYG | LLOYDS BANK GRP | BANKS FOREIGN | 4 | 69 | 8.5 | 5.0% | GBR |
| DB | DEUTSCHE BK AG | BANKS FOREIGN | 4 | 67 | 7.9 | 0.7% | DEU |
| NWG | NATWEST GROUP | BANKS FOREIGN | 4 | 66 | 7.5 | 7.9% | GBR |
| BK | BANK OF NY MELL | BANKS MAJOR REGIONAL | 5 | 53 | 15.0 | 1.6% | USA |
| UMBF | UMB FINL CORP | BANKS MIDWEST | 4 | 55 | 10.1 | 1.3% | USA |
| FHN | FIRST HRZN CORP | BANKS SOUTHWEST | 4 | 62 | 10.9 | 2.8% | USA |
| CIB | GRUPO CIBEST SA | DIVERSIFIED OPERATIONS | 5 | 54 | 7.1 | 7.6% | COL |
| TEL | TE CONNECT-LTD | ELEC MISC COMPONENTS | 4 | 56 | 18.2 | 1.5% | IRL |
| PNC | PNC FINL SVC CP | FINANCE INVESTMENT BANKS | 4 | 63 | 10.9 | 3.2% | USA |
| PFG | PRINCIPAL FINL | INSURANCE MULTI LINE | 4 | 52 | 10.5 | 3.3% | USA |
| FERG | FERGUSON PLC | MACHINERY GEN INDUSTRIAL | 4 | 52 | 20.4 | 1.5% | USA |
| AEM | AGNICO EAGLE | MINING-GOLD | 5 | 72 | 15.2 | 0.9% | CAN |
| KGC | KINROSS GOLD | MINING-GOLD | 5 | 72 | 11.3 | 0.5% | CAN |
| AGI | ALAMOS GOLD INC | MINING-GOLD | 5 | 72 | 14.3 | 0.4% | CAN |
| NEM | NEWMONT CORP | MINING-GOLD | 5 | 61 | 13.0 | 0.9% | USA |
| B | BARRICK MINING | MINING-GOLD | 5 | 54 | 12.4 | 1.5% | CAN |
| SM | SM ENERGY CO | OIL & GAS U S EXPLO & PROD | 4 | 64 | 4.1 | 2.8% | USA |
| MPC | MARATHON PETROL | OIL REFINING & MARKETING | 5 | 83 | 9.0 | 1.6% | USA |
| PSX | PHILLIPS 66 | OIL REFINING & MARKETING | 4 | 66 | 9.6 | 2.9% | USA |
| TIMB | TIM SA-ADR | WIRELESS NON-US | 4 | 58 | 12.1 | 4.7% | BRA |
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The most striking characteristic of this list is that stocks of companies primarily listed in the USA account for just 10 of the 26 qualifiers. Stocks with primary listings in foreign countries account for less than 10% of the ValuEngine universe of coverage, so the prevalence of foreign stocks in the results is of interest. The list is dominated by finance companies including 9 foreign banks; of these, NatWest (NWG) had the lowest P/E ratio and the highest dividend yield, an impressive 7.9%. There are 5 USA-listed financial services firms. The highest rated of these is Bank of New York Mellon (BNY) while the highest dividend yield is provided by insurer Principal Financial (PFG). Together, the financial sector comprises more than 50% of the list.
The list of qualifiers also includes five metals and mining companies, four of which are Canadian: Agnico Eagle (AEM); Kinross Gold (KGC); Alamos Gold (AGI); and Barrick Mining (B); with the final one being US listed Newmont Gold (NEM). Energy, as expected, provides a major portion of this list. Marathon Petroleum (MPC) exemplifies this with an undervaluation in the 83rd percentile along with a forward P/E Ratio of just 9.
Although this list is keeping within with the sectors we indicated were desirable in a period of expected inflation and economic stagnation, not all of those sectors had any stocks rated at least a 4 (Buy) that passed these screens. These sectors include Consumer Staples, Health Care, and Utilities. To provide diversification opportunities, here are the stocks rated 3 that passed these screens that also have the highest forecast 12-month returns even though that forecast is for a bit less than 1%.
| Ticker | Company Name | Sector Name | VE Rating | Valuation Rank | Forward P/E Ratio | Div. Yield |
| SCI | SERVICE CORP INTL. | Consumer Staples | 3 | 52 | 18.05 | 1.9% |
| TMO | THERMO FISHER | Health Care | 3 | 74 | 17.13 | 0.4% |
| OGS | ONE GAS INC | Utilities | 3 | 53 | 16.64 | 3.3% |
For those not familiar with the firms, Service Corporation International (SCI) provides funeral and cemetery services while Thermo Fisher (TMO) makes scientific instruments and ONE Gas, Inc. (OGS) is a 100% regulated natural gas distribution utility serving Texas, Oklahoma and Kansas.
Since individual stocks, even those with low betas, have more price volatility as a group than ETFs due to portfolio diversification, many may prefer that safety as a place to divert some growth-index-bench marked assets. Therefore, we used VettaFI’s ETF database (etfdb.com) to perform a screen of ETFs covered by ValuEngine that have a Beta of 1.00 or less and also pay at least a 2% dividend and have a Price/Earnings Ratio of less than 20. We also screened out ETFs with less than half a billion dollars under management. 11 ETFs met these criteria. For easy comparison, at the bottom of the table we provide the equivalent statistical data for index ETFs representing three popular US market segments.
| Ticker | Name | VE Rating | 1 Mo Rtn | YTD Price Change | 1 Year Return | 3 Year Return | Exp. Ratio | Div. Yield % | P/E Ratio | Beta |
| DIVB | iShares Core Dividend ETF | 3 | 4.49% | 11.09% | 22.22% | 20.23% | 0.05% | 2.3% | 19.2 | 0.85 |
| FDRR | Fidelity Dividend ETF for Rising Rates | 3 | 1.88% | 6.15% | 27.01% | 19.95% | 0.15% | 2.2% | 18.9 | 0.87 |
| FDVV | Fidelity High Dividend ETF | 3 | 0.35% | 5.59% | 20.41% | 19.64% | 0.15% | 2.8% | 18.2 | 0.86 |
| ONEY | State Street SPDR Russell 1000 Yield Focus ETF | 2 | 0.55% | 10.61% | 17.95% | 14.44% | 0.20% | 2.9% | 13.7 | 0.84 |
| RDIV | Invesco S&P Ultra Dividend Revenue ETF | 2 | 2.43% | 10.34% | 23.12% | 18.98% | 0.39% | 3.7% | 14.0 | 0.77 |
| VFVA | Vanguard U.S. Value Factor ETF | 2 | -1.50% | 6.80% | 23.61% | 16.86% | 0.13% | 2.0% | 13.7 | 0.94 |
| KRE | State Street SPDR S&P Regional Banking ETF | 2 | -3.99% | 4.84% | 17.41% | 22.70% | 0.35% | 2.3% | 11.2 | 0.86 |
| KBE | State Street SPDR S&P Bank ETF | 2 | -4.00% | 2.72% | 15.58% | 24.41% | 0.35% | 2.4% | 10.9 | 0.92 |
| FXO | First Trust Financials AlphaDEX Fund | 2 | -2.63% | -2.09% | 9.23% | 20.42% | 0.60% | 2.2% | 11.0 | 0.97 |
| SDY | State Street SPDR S&P Dividend ETF | 1 | -0.87% | 6.82% | 10.96% | 9.55% | 0.35% | 2.5% | 17.5 | 0.71 |
| XMLV | Invesco S&P MidCap Low Volatility ETF | 1 | -2.05% | 4.89% | 6.45% | 11.17% | 0.25% | 2.8% | 17.1 | 0.71 |
| SPY | State Street SPDR S&P 500 ETF | 4 | 3.32% | 7.89% | 24.76% | 22.06% | 0.09% | 1.0% | 22.3 | 1.00 |
| DIA | State Street SPDR Dow Jones Industrial Average ETF Trust | 3 | 0.01% | 3.28% | 17.17% | 15.66% | 0.16% | 1.4% | 20.4 | 0.87 |
| MDY | State Street SPDR S&P MIDCAP 400 ETF Trust | 3 | -2.00% | 8.36% | 17.28% | 14.32% | 0.24% | 1.1% | 17.2 | 1.02 |
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Only three of the 11 ETFs were rated at least 3 (Hold). ETFs rated 2 (Sell) or less are forecast by our model to gain less or lose more than 75% of all the ETFs we cover. In contrast ETFs rated at least 3 (Hold) that passed this screen combine forecast market-median performance along with the desired conservative criteria. The three ETFs that cleared this hurdle include:
iShares Core Dividend ETF (DIVB) – offers a low-cost approach to broad U.S. equity exposure. It treats dividends and share buybacks as two sides of the same coin, focusing on companies that aggressively return capital to shareholders.
Fidelity Dividend ETF for Rising Rates (FDRR) – The Fidelity Dividend ETF for Rising Rates (FDRR) targets dividend-paying equities designed to withstand or benefit from a rising interest rate and inflationary environment. Traditional dividend sectors like Utilities and REITs usually drop when bond yields rise; FDRR systematically tilts away from those sectors toward pro-cyclical areas like Financial, Industrial and Technology.
Fidelity High Dividend ETF (FDVV) – seeks to provide high current income alongside long-term capital appreciation. Unlike traditional high-yield funds that trap investors in slow-growth sectors, FDVV’s proprietary model captures a unique hybrid of traditional high-yielders and high-growth technology giants that pay growing dividends.
Finally, we relaxed the assets under management constraint to see if any ETFs rated a 5 (Strong Buy). We also changed the 2% minimum dividend yield to 0.1% for stability but not necessarily needing the high income cushion. This screen found two 5-rated ETFs that satisfied the modified valuation, yield and beta constraints. We found two with very interesting methodologies.
| Ticker | Name | 1 Month Return | YTD Price Change | 1 Year Return | 3 Year Return | Exp. Ratio | Div. Yield % | P/E Ratio | Beta |
| AADR | AdvisorShares Dorsey Wright ADR ETF | -4.39% | -2.35% | 6.23% | 21.92% | 1.09% | 0.6% | 18.8 | 0.94 |
| ALTL | Pacer Lunt Large Cap Alternator ETF | -1.87% | 2.60% | 28.89% | 8.89% | 0.60% | 1.1% | 19.3 | 0.78 |
A look inside these two ETFs:
Pacer Lunt Large Cap Alternator ETF (ALTL) – dynamically rotates its holdings between low-volatility and high-beta U.S. large-cap stocks based on market momentum to capitalize on prevailing conditions.
The AdvisorShares Dorsey Wright ADR ETF (AADR) is an actively managed fund that provides international equity exposure by primarily investing in American Depository Receipts (ADRs). It utilizes a systematic, technically-driven relative strength strategy to identify and invest in global stocks showing strong momentum.
We found these funds and their methodologies intriguing and worthy of further investigation, but they are relatively small, below 100 million dollars in assets, and come with much higher fees. This aspect creates doubt about how much confidence one should have in after-fee returns.
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Generally speaking, we advise most people not to try to time the market, to stick to their investment plans and criteria and to ignore the fear-mongering of so-called experts. However, there are times when hedging one’s bets and sacrificing some potential price gains for less susceptibility to major losses makes sense. An environment where higher-for-longer inflation rates are expected to be combined with a stagnant economy is quite concerning. Therefore, we thought it was a good week to detail less aggressive strategies using stocks and/or ETFs for core deployment to navigate such environments. Asset management, like life, is a series of trade offs and tough decisions. Smaller portions of investment portfolios can be moved into such safer options, it is not all or nothing.
Herb Blank
ValuEngine Chief Quantitative Analyst
www.ValuEngine.com (ValuEngine, Inc) is a stock valuation and forecasting service founded by Ivy League finance academics. VE utilizes the most advanced quantitative techniques and analysis available to analyze over 4,200 US stocks, 700 US ETFs, and 1,000 Canadian stocks. Fair market valuations, forecast target prices, and buy/hold/sell recommendations are updated DAILY.
www.ValuEngineCapital.com (ValuEngine Capital Management, LLC) is a Registered Investment Advisory firm that trades a variety of different portfolios based upon the ValuEngine.com research models. Each portfolio has a different risk/return profile, so clients can be placed in strategies that fit their specific investment needs.
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