Overvaluation pressures have moved back to mid-teens / low-twenties while market returns have been lackluster. Stocks need to catch-up to expectations.
Overvaluation pressures have moved valuations back to mid-teens / low-twenties while market returns have been lackluster. U.S. AllCap return, year-to-date, is flat at (0.57)% giving credibility to the point that investor expectations are still positive, but not as euphoric as earlier in the year when valuations were in the high twenties. LargeCap has moved up the most, 5.0 percentage points, followed by MidCap advancement of 2.2 points followed by SmallCap with an increase of 1.7 points. It is interesting that SmallCap is the leader in gains so far this year at 1.76%.
Six of the ten LargeCap sectors moved up in fair value this month and four moved down while one more sector moved to within 10 points, +/-, of 100% Fv. Only one sector, Consumer Discretionary, is overvalued at 140.9% Fv. Additionally, one sector, Energy, is in cautionary territory at 125.7% Fv. Both of these sectors advanced twelve or more points in relative fair value over the month. The other advancing sectors were: Health Care, Technology, Materials and Utilities.
Materials advance of 1.4 points moving the sector’s fair value to 100.3% Fv. The three sectors that gave up relative fair value were: Consumer Staples, Industrials and Telecom. Both Consumer Staples and Telecom remain below 100% Fv at 93.2% Fv and 82.9% Fv, respectively. Telcom has struggled to reach even see the 100% Fv line for a long time. Outside of Consumer Discretionary, the LargeCap universe of sectors is well distributed around fair value.
MidCap Energy advanced the most taking the sector from a normal range to cautionary at 126.0% Fv. Two sectors are in overvalued range, Consumer Discretionary at 137.2% and Health Care at 137.2% Fv. Consumer Discretionary advanced 5.5 points and Health care advanced 7.2 points to both reach this high level. Telecom moved below 100% Fv to 93.1% Fv which was a sizable drop of 10.4 points.
SmallCap Health Care remains overvalued at 145.5% Fv a 9.6 point increase pushing the sector ahead of previous month valuations. This is the only SmallCap overvalued sector. Two sectors are in cautionary range, Information Technology and Utilities. Utilities is a new arrival to the caution classification advancing 3.5 points to 120.5% Fv. All of the sectors, except Consumer Staples, is on the positive side of 100% Fv and even it is very close at 98.7% Fv. Energy advanced the most, 17.1 points reaching 119.2% Fv. Financials gave up the most, 2.9 points moving slightly down to 110.9% Fv.
Two industry groups are now overvalued. Consumer Durables & Apparel at 140.5% Fv and Retailing at 145.1% Fv. Consumer Durables and Retailing were both overvalued last month and have continued to move in that direction adding nearly 6 points in Consumer Durables and 12 points in Retailing. This makes Retailing the highest valued industry group in the market. This level is unsustainable. Two industry groups are considered cautionary, Health Care Equipment & Services at 129.0% Fv and Consumer Services at 123.5% Fv. Consumer Services is a new arrival to the caution classification when it added 6 points to relative fair value last month. The lowest score in relative fair value goes to Media at 93.6% Fv. There are now four groups below 100% Fv, one less than last month, and 16 above this level. Twelve groups are within 10 points +/- which is 4 less than last month.
Influence in determining fair value has taken a shift toward earnings recently. Across all segmentations, earnings increased by 2.0 points in Core stocks, 1.2 points for importance among the Core stocks while both earnings and dividends have increased for Revenues increased slightly for Aspirational stocks approaching the Market stocks. high influence level of earnings within the classification at 57%.
Earnings and dividends increased their influence within the Buy classification while revenues increased in influence amongst stocks that were classified as Sell considerations.
Revenues and earnings continue to dominate the Sell classification while Earnings dominate Buy and Hold classified stocks
Revenues and earnings dominate LargeCap stocks by approximately 13 points while earnings dominate MidCap stocks holding a 15 point dominace over revenues and a 24 point dominance over dividends. SmallCap is equally dominated by revenues and earnings with dividends trailing far behind at 22.1%.
Revenues continue to have a dominate influence in Health Care at 76.3%, Technology at 68.9% and Telecommunications at 66.7%. Earnings have a considerable influence in Consumer Discretionary, Consumer Staples, Materials and Utilities while dividends have strong influence in Financials and Materials, where dominance is shared equally with earnings.
The first market plot in Figure 5 is for the entire universe of stocks, equally weighted, with the centroid identified as a red diamond with a black border. The centroid in each consideration group will remain the same shape and color, red diamond. The centroid of the Universe is at coordinates 1.11 and 10.15 indicating that return moved higher by a greater amount than the increase in relative fair value on an equally weighted basis. Since the market is 15 points above 100% Fv, this is a good relative movement.
The Buy centroid is located at 0.68 and -21.8 indicating that valuations moved closer to the center and have a better return as a group which is favorable.
Sell stocks have a centroid at 1.56 and 37.24 moving to the upper right indicating a condition where Sell classified stocks have moved to the upper right at a faster rate than the universe or Buy classified stocks. The Sell classified stocks are becoming more overvalued while the universe and Buy classified stocks are become more fairly valued.
