Stock prices have moved down from their highs, but markets remain optimistic, even after considering the impact of the virus from China and a logistic disappointment in Iowa. The optimism is well placed, but may be slightly ahead of the market. Currently, 19.7% of the market is undervalued, but only 7.6% of the companies currently have strong enough fundamentals to be considered a BUY.
On the Overvalued side, 7.2% of the market is Overvalued which is also an increase; in this case by 2.8 points. About ½ of the stocks in this group still have enough strength in their fundamentals to avoid a Sell consideration. (The stock’s price is higher than fundamentals, but not so high that they are extreme.) However, 2.9% of the market is both Overvalued and has not been able to be ranked well enough to maintain the high valuation and are considered Sell candidates, a 0.2 point increase.
There is increasing caution over earnings reports that will start coming out soon for the 3rd quarter. If they are disappointing, the resulting move downward in prices should not force valuations to become excessive because prices are currently near fair value. It would be more damaging if market prices were in overvaluation range and earnings disappointed. Investors appear to be preparing for disappointing earnings. If the earnings do not disappoint, there most likely will be a significant move to the upside.
Two weeks ago, the media was overwhelmed with predictions of a “guaranteed” recession and market collapse. The reason? Bond yield curve inversion took first place, but the discussion was a bit hazy about when. Some said any day now; others said, within 18 months, or so. There may be a correction, eventually, but let’s look at the statistics.
The Total market is reflecting a good fair value at 94.8% with both Large Cap and Mid Cap segments at fair value, 100.5% and 100.8% respectively. Small Cap continues to stay in the undervalued side of fair value range at 88.2%. Full report in World Markets section.