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Market Briefing

June 2021

After some volatile trading sessions for May, stock market averages finished in positive territory with the small and mid-cap segments outpacing the gains in large capitalization stocks. Earnings reporting season concluded with a larger than average percentage of companies exceeding analysts’ estimates. There were also positive headlines indicating that the economy continues to improve. The indexes that measure manufacturing and non-manufacturing activity both indicated expansion. Auto sales and factory orders had increases in their most recent measurements. The CPI report for April came in significantly above expectations sparking a market selloff. Both new and existing home sales declined in April. Investors favored a combination of value and momentum stocks during the month. Price/sales, price/book value, and operating earnings yield were among the best performing stock factors. In addition, earnings trend, earnings momentum, and Ford’s value/momentum model had strong relative results. Large cap growth stocks underperformed. Growth rate estimates and recent period sales and earnings growth were among the poorest stock selection factors in May. More than half of the industry groups we cover had positive average price changes for the month. Notable groups among the best performers were in the energy and materials sectors. Coal and oil-related industry groups were near the top of the performance list. Mining, steel and aluminum also performed relatively well. The weakest industries during the month included drugs and medical supplies, food vendors and stores and electric utilities.

Value of the Market

The S&P 500 index rose 0.5% in May. The slight price increase along with unchanged interest rates caused the aggregate PVA for the index to end unchanged 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 4.4% in May. The higher index value countered by 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 just above the 1.0 fairly valued PVA level. In addition, the average PVA for the index is above its average level of the last 10 years.

The Smallcap 600 Index increased by 2.0% in May. The price rise countered by unchanged long term interest rates caused the aggregate price to intrinsic value for the Smallcap 600 index to decline slightly 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. In addition, the aggregate index PVA is 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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