Market Briefing

January 2022

Equity indexes advanced in December with the large, mid and small cap segments of the market all enjoying strong gains. Economic news headlines were mostly positive for the month. An exception to this was the payroll report for November. Non-farm payrolls increased by only 210,000 which was well below estimates. Manufacturing and non-manufacturing indexes continued to indicate expansion. Price increases persisted with the inflation rate reaching a new multi-decade high level. Retail sales had a moderate advance in November. Existing and new home sales reports were also both higher. The discovery of the fast-spreading Omicron variant of the Covid virus worried investors. Concerns that new lockdowns would take place and negatively affect businesses drove stock prices lower. The Fed signaled rate increases that would take place in the next year. Investors favored high quality stocks in December. Ford’s quality rating, share buyback, dividend yield and dividend growth rate were among the top performing stock selection factors for the month. Momentum and high growth stocks were among the least liked during November with projected growth rate, short-term sales growth, earning momentum and high beta making up the bottom of the selection factor performance list. Three quarters of the industry groups we cover had positive average price changes for the month. The materials sector had many of the top performing groups. Aluminum, forest products, coal, paper, and copper were among the best performing groups. Auto & truck manufacturing, drugs, and oil well drilling groups were notably among the weakest performers for the month.

Value of the Market

The S&P 500 index advanced 4.4% in December. The price increase along with rising interest rates caused the aggregate PVA for the index to end higher 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 rose 4.9% in December. The higher index value along with rising long term interest rates caused the aggregate price to intrinsic value for the index to end higher 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 advanced 4.4% in December. The price rise along with higher long term interest rates caused the aggregate price to intrinsic value for the Smallcap 600 index to end higher 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. However, the aggregate index PVA is now above 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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