Market Briefing

December 2021

Equity indexes declined in November. However, large cap stocks continued their recent outperformance relative to mid and small cap stocks. Economic news headlines were mostly positive for the month. The payroll report for October was strong leading to an unemployment rate of 4.6%. Manufacturing and non-manufacturing indexes continued to indicate expansion. Inflation continued to remain high with CPI reaching the highest level in many years. Retail sales advanced in October. Existing and new home sales reports were both moderately higher. An approximately $1 trillion infrastructure bill was passed and signed into law. A new pill-form treatment for Covid showed positive trial results. However, the identification of a new variant of the virus spooked the market toward the end of the month. Investors favored a combination of growth and value stocks in November. Short-term earnings per share and sales growth were the top performing selection factors. P/e ratio, operating earnings yield, and price/cash flow also performed well. Ford’s value/momentum model which combines valuation and growth factors also had good results for the month. Interestingly, momentum and some growth measures were the biggest underperforming selection factors in November. With the broad selloff, less than one quarter of the industry groups we cover had positive average price changes for the month. Some of the best performing groups were mobile homes, forest products and semiconductors. The energy sector reversed from the strong performance in the prior month. The oil sector and coal were among the weakest groups. In addition, healthcare groups including medical supplies, medical services and drugs were near the bottom of the industry performance ranking.

Value of the Market

The S&P 500 index declined 0.8% in November. The price decrease along with unchanged interest rates caused the aggregate PVA for the index to end lower for the month. Based on current earnings, expected growth, and current interest rates, the aggregate pva for the S&P 500 remains below the 1.0 fair value level. However, the aggregate price to intrinsic value is above its 10-year average level.

The S&P Midcap 400 Index fell 3.1% in November. The lower index value along with unchanged long term interest rates caused the aggregate price to intrinsic value for the index to decline for the month. Based on current earnings, expected growth, and current interest rates, the S&P Midcap 400 Index is below the 1.0 fairly valued PVA level. However, the average PVA for the index remains above its average level of the last 10 years.

The Smallcap 600 Index declined 2.4% in November. The price drop along with unchanged long term interest rates caused the aggregate price to intrinsic value for the Smallcap 600 index to end lower for the month. Based on current earnings, expected growth, and current interest rates, the S&P Smallcap 600 Index is below the 1.0 fairly valued level. In addition, the aggregate index PVA is now slightly below its 10-year average level.

Ford’s price to value ratio (PVA) is computed by dividing the price of a company’s stock by the value derived from a proprietary intrinsic value model. A PVA greater than 1.00 indicates that a company is overpriced while a PVA less than 1.00 implies that a stock is trading below the level justified by its earnings, quality rating, dividends, projected growth rate, and prevailing interest rates. While looking at the PVA for an individual company can give a good indication of its value, the average PVA for the market as a whole can provide insight into current valuation levels.

Source: Ford Equity Research

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