Market Briefing

Equity prices continued to advance in July. Indexes constituting large, mid, and small capitalization issues all finished with solid gains. News of positive coronavirus vaccine developments had a particularly leavening effect on stock prices. In addition, news pointing to a rebounding economy was released during the month. Payroll numbers for June were above expectations. In addition, Retail sales, housing starts, and existing home sales all posted gains. Despite this, the overall Q2 GDP contracted by nearly a third on a quarter-over-quarter basis. The federal government began discussions around a further stimulus spending bill. Second quarter earnings for several large cap growth companies came in above analyst’s estimates. Investors continued to favor momentum stocks in July. Price gain measures, growth, earnings momentum and earnings surprise were among the top performing selection factors. Value stocks fared poorly for the month with p/e ratio, price/book value, peg ratio and price/value among the poorest performing factors. About 75% of the industry groups we track had positive average price gains in July. Notable among the top performing groups were forest products, plumbing, heating & ac, and miscellaneous metals & mining. The oil sector performed poorly with oil well drilling, integrated domestic oil, and integrated international oil among the weakest groups. Retailers including drug stores and department stores were also among the poorest performers in July.

Value of the Market

The S&P 500 index increased 5.5% in July. The price rise countered by a drop in 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 is well below the 1.0 fair value level. The aggregate price to intrinsic value is also below its 10-year average level.

The S&P Midcap 400 Index rose 4.5% in July. The higher index value countered by a decrease in long term interest rates caused the aggregate price to intrinsic value for the index to end flat 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. In addition, the average PVA for the index remains more than one standard deviation below its mean level of the last 10 years.

The Smallcap 600 Index increased by 4.0% in July. The price rise countered by a decrease in long term interest rates caused the aggregate price to intrinsic value for the Smallcap 600 index to end unchanged for the month. Based on current earnings, expected growth, and current interest rates, the S&P Smallcap 600 Index is well below the 1.0 fairly valued level. In addition, the aggregate index PVA is more than one standard deviation below its 10-year average level.

Source: Ford Equity Research

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