August 2023

U.S. equities continued to advance in July with the small and mid-cap sectors of the market, on average, outpacing the largest capitalization stocks. Economic headlines for the month were mixed. Non-farm payrolls declined in June and were lower than estimated. The unemployment rate fell slightly to 3.6%. An index measuring manufacturing activity was lower in June. However, factory orders increased. A similar measure of the services segment of the economy showed expansion. Retail sales were higher in June. Inflation rates continued to decline with the CPI rate coming in at 3.0%. The housing sector weakened with housing starts, existing home sales and new home sales all falling in the month. Investors favored value stocks in July. The top performing stock selection factors were p/e ratios, price/book value, and price/value ratio. based on normal eps, and peg ratio. Higher quality and larger capitalization stocks were less favored. In addition, price momentum performed poorly for the month. Most of the industry groups we cover posted positive average price gains in July. Notable top performing groups included soap & household products, auto & truck manufacturing, and oil well drilling. Consumer goods groups were among the poorest performers with vending & food services, cosmetic & toiletries, tobacco and soft drinks appearing near the bottom of the list.

Value of the Market

The S&P 500 index was up 3.1% in July. The price advance combined with increased interest rates caused the aggregate PVA for the index to rise for the month. Based on current earnings, expected growth, and current interest rates, the aggregate pva for the S&P 500 is slightly above the 1.0 fair value level. The aggregate price to intrinsic value is also above its 10-year average level.
The S&P Midcap 400 Index rose 4.0% in July. The higher index value along with an increase in 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 exceeds the 1.0 fairly valued PVA level. It also remains above the average level for the PVA index of the last 10 years.
The Smallcap 600 Index advanced 5.4% in July. The price rise along with an increase 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 is above the 1.0 fairly valued level. The aggregate index PVA also 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