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.
The Total market is now 5% higher than it was 12 months ago with a valuation of 116.2%. The relationship between the two values is much better than previous. When the market was at this level a year ago we were experiencing valuations that were increasing at a rate that was more rapid than the increase in market value and had reached a ratio of nearly 2.00. The expectations ratio is now a more reasonable 1.74.
The market over the past 30 days has been very much like riding a roller-coaster. You start and stop in the same place while experiencing a rather thrilling period in-between. The DOW moved over 1,000 points resulting in a 4% move if you measure the change between the high for the month, 25,877, to the low, 24,815. However, the change from this time last month, May and today, June, is less than 1% and only 189 points, less than a good 1 day move.