The start of 2015 has brought with it the same discussion that occurs at the beginning of every year. Within the first two weeks, many wish to anchor their forecast for the next 50 weeks based on what has happened in the first 2 weeks. Already we have heard the market is ready for a correction, ready for continued growth, ready for robust growth and every version in-between. The market must be one of the most emotionally disturbed individuals ever known.
Rather than determining the next year on the first two weeks, let’s look at how the current valuations compare against the past several years. Right now a combined 25% of the market is within the boundaries of a combined cautionary high valuation (yellow) and over valuation (red), with 6% falling within the range of undervaluation (green). The far majority, 69% is fairly valued (grey). This is in contrast to 2013, September when 28% was considered overvalued alone and another 13% was in the caution range for a combined 41%. Almost the same amount of stocks, 5% – 6% were considered undervalued. Only 54% of the market was considered trading within fair value in September. There is a much higher portion of the market today that is considered within in the fair value range.
Since September, the market increased by over 13% in overall value. Expectations were high in the months leading up to September. Investors expected continued growth and economic improvement. Granted there were plenty of negative views, but corporate earnings continued to improve along with revenues. While expectations were on the high side, they proved to be well placed. Economic performance of the companies that make up the market has improved while expectations have not become over enthusiastic. A greater percentage of the market is within fair value now than in September.
It appears there is room for the market to continue along a growth path as a high percentage of stocks remain within fair value range. It may be a rough path, but it appears the probabilities favor an upward path all the same. There is some concern that 25% of the market is above fair value, but on-balance, the probabilities favor continued growth.