Market Briefing

August 2022

U.S. equities enjoyed a strong rebound in July with gains extending across all capitalization sectors. This was despite the expectations of continued Fed rate hikes and persistent high inflation. Economic headlines were mixed. Factory orders were higher for May. Payrolls continued to advance in June, keeping the unemployment rate at 3.6%. Retail sales also posted a rise for June. CPI increased 9.1% in June. Housing continued its decline with lower housing starts and declines in sales of new and existing homes. The Fed raised short term rates by 75 basis points. GDP declined 0.9% for the second quarter. Investors favored more volatile growth stocks during the month. Selection factors including beta, sales growth, and projected growth rate were among the top performers in July. At the same time, the higher quality stocks that have done relatively well in recent months were less favored. Price gains over the past one to six-month period were at the bottom of the factor performance list. Quality factors including Ford Quality Rating, dividend yield, market capitalization and share buyback were also relatively weak performers. In a reversal from the previous month, nearly all the industry groups we track had average price increases in July. Notable rebounds were seen in semiconductors, electrical equipment, hotel & motel and auto and truck manufacturing groups. Tobacco, home appliances and insurance were the groups with negative average price changes. Telecommunications, food industries, and the retail group were also some of the weakest performers for the month.

Value of the Market

The S&P 500 index rose 9.1% in July. The price advance countered by lower 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 rose 10.7% in July. The higher index value countered by a decline in long term interest rates caused the aggregate price to intrinsic value for the index to end lower 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 9.9% in July. The price rise countered by a decline in 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 remains below the 1.0 fairly valued level. However, the aggregate index PVA remains 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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