HIGHLIGHTS: Friday, February 12 2016
Last week we were looking at a market that was 92.5% of fair value only to see further deterioration to just yesterday, closing at 85.9% FV. This is an additional 6.6 percentage points closer to undervaluation. We are now 14.1 percent below fair value and over 24 percentage points off of the high from 2015. These are very low valuations and do not reflect the economic conditions in the United States or the world. This is frustrating and unfortunately what occurs when market fear enters the investment world.
American labor conditions are very close to full employment while average wages are climbing. The level of hourly compensation at over $26/hour places the U.S. at a globally high level while still commanding an increase in hourly compensation and increases in employment rates. That means American labor is competitive and in demand for the type of sophisticated development we perform well. This is a worthy accomplishment especially given global competitiveness.
Earnings have been slower than previous periods, but that was expected. There have been some surprises positively and negatively, but for the most part earnings have been inline and reflective of continued improvement. European GDP and employment has also been moving in the right direction.
Much of the movement in the stock market has been between sectors. Consumer Discretionary moved into undervalued territory at 76.2% accompanying Energy at 79.4%. This is a slight improvement in Energy which was previously at 78.9FV. Health Care is very close to slipping into the undervalued area at 80.6%FV, just 0.6 percentage points above. Consumer Staples lost ground on fair valuations slipping just below FV at 96.8%. Telecommunication Services remained close to fair value at 99.7%. Utilities has held on to the positive side of fair value at 102.5% FV.
There are numerous undervalued stocks available now than over the past three years. The current market is demonstrating fear rather than logical analysis of economic conditions. The percentage of undervalued stocks usually increases as the market cleans fear from the system. From what I am seeing in the build of undervalued stock names across all capitalizations, the probability of a market beginning to respond positively from valuations may be returning. Investing a portion of the accumulated income and interest of the portfolio into the market would be a strong consideration.