Last year there was every sign of a market heading full tilt into overvaluation. Today, valuations are a better reflection of market conditions than either February a year ago, or December. Last year was full of high expectations and a never ending “synchronized global growth” melody, followed in December by a good rendition of “The Sky is Falling”. Today’s valuations are realistic
The corrections that took place in the last quarter of 2018 moved the market from an overvalue tilt to an undervalue tilt and opportunity. Many of the stocks that were overvalued, classified as SELL/SELL WATCH moved back to reside within the fair value range. Thirteen percent moved out of SELL/SELL WATCH to HOLD. HOLD grew from 62% to 67%. Just as overvalued stocks moved back into fair value, fair value stocks fell into undervalue. Eight percent of the overall market moved into BUY/BUY WATCH classification.
Valuations are near neutral at 102.3% Fv. The rate of negative adjustment continues to slow giving up just 1.4 valuation points, again half of the previous period rate, which was also half of the prior rate. LargeCap surrendered the most last period, but this time Smallcap gave up 7 times what LargeCap surrendered and MidCap gave up three times as much.
Over the past 12 months there have been considerable changes taking place in stock consideration classifications. The most significant changes have taken place in the last 14 days.
Stocks trading in their normal Fair Value range, HOLD, has dropped from 66% to 53%. Roughly half of the total market is trading in their Fair Value range at the present time. Over the past 24 months the shift was from HOLD to SELL WATCH / SELL. This was occurring as investor expectations increased thereby pushing stocks above their Fair Value range. Over the past 14 days stocks have been moving from HOLD into BUY WATCH and
BUY. BUY WATCH has increased 9 percentage points to 10% of the total market. BUY has grown 4 points from 11% to 15%.
Investor expectations have moderated while earnings advanced producing a welcomed reduction in valuation pressures across the entire market. Relative valuations have moved just below Cautionary levels (120.0% Fv) at 119.1% Fv which is a generous reduction from last month.
Expectations continue to run high in the American markets, across all three market capitalization categories, and nearly every sector. USA bond markets continue to see deep colors of red as do international stocks and bonds.
Are the recent trade disputes the reason USA markets are “disappointing” investors? Why are investors saying they are disappointed? We are not sure really. As of Friday the total market is up 6.2% this year which is not far off of the long term average and very close to our estimate for 2018. Are the disappointments more in terms of what people thought could be obtained in 2018? This appears more likely. See the full report in Client Service > World Markets > Americas > USA Stock Consideration Report
Of the three major market capitalization categories SmallCap has advanced the most by adding 5.22 points to reach a positive 3.42% return after seeing red most of the year. MidCap has also added 2.47 points to put its head above breakeven at 0.44%.
After a nice rationale correction in February, the market decided to continue into March on the same objective. LargeCap stocks have repositioned themselves better and remain well in fair value range at 115.3% a drop of just over 1 percentage point. MidCap stocks have moved well below their previous cautionary levels to 119.0% Fv. This is a welcome drop of over 6 points back into fair value range. MidCap also retreated away from caution and now sits within fair value at 116.2% Fv. This was a drop of 6.1 points. All three market capitalization categories are now back within fair value. These relative valuations are closer to a normal market.
In the most recent Snap-Shot we discussed the move away from overvaluation in MidCap stocks and the increase in overall relative valuation in LargeCap stocks. This directional change has continued with MidCap moving back to 125.5% Fv, a reduction of 4.4 percentage points from our January Considerations Brief. LargeCap has advanced to 116.7% Fv a gain of 3.4 percentage points over the same time period. SmallCap has remained basically unchanged at 122.3% Fv. This movement is welcomed, especially given the corrective environment taking place at the end of last week and early this morning. World markets have joined the U.S. posting major drops in market valuations with the only exception being China.