U.S. Largecap Sector Relative Fair Values: Thursday, May 26, 2016

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Significant Changes Since Last Week:

Over the last week the market has moved 335 points from to 17,861 representing an advance of 1.9%. This is a positive reaction to continuing improvement in the housing market centered around increased sales in existing and new homes and corresponding increases in median prices. Additionally, steady improvement in energy prices is encouraging for the eventual return of many previously delayed capital projects in the oil industry. Although there is little discussion in the media regarding future energy prices, we may see a $65/bbl crude price before year end.

Four sectors remain in the above 100% FV range, Consumer Staples, Industrials, Telecommunication Services and Utilities. The only sector that gave up any ground was Telecom moving down 0.6 percentage points to 101.4% FV. All of the other nine sectors advanced with Healthcare and Materials moving upward by 1.9 percentage points. The advance is most significant for Healthcare because the sector has been a laggard all year at 89.6% FV. Even Energy moved back above 90% FV earlier this year. The advancement for Materials places the sector exactly at 100% FV and it soon may become the latest member to join the above 100% FV club.

U.S. Allcap Industry Relative Fair Values

We recently added a new relative fair value table to the market analysis that refines the sector classifications to include an industry group. We are using the Standard & Poor’s industry classification. Many of the names used in industry groupings are easier to relate to than broad sector classifications. There are 23 industry groupings that fold into ten sector classifications. In the table that follows you will see 21 of the industry groupings. We have chosen not to include the Utilities and Energy groupings as they are already displayed in the sector classifications above.


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The added detail is interesting. Of the 21 industry groupings 9 are over 100% FV. This represents 43% of the sectors. The strongest of the 9 is Food, Beverage & Tobacco at 106.6% FV followed closely by Real Estate at 106.3%. Given the recent favorable housing data the position of Real Estate is understandable.

On the undervalued side of the fence we have 12 industry groups with Transportation presenting the most opportunity at 88.2% FV. Again this is a logical rating with the rail carriers depressed as a result of a reduction in energy related projects throughout the Midwest and Southwest along with lower tonnage being generated from the major coal mines within the United States.

In looking at the bar graph in the last column for the industry groupings it is nice to see the somewhat even distribution of relative positions. We become uncomfortable when there is a single group, or just two or three industry groups that tilt the weighting in either direction, or if there is a severe bar-bell type distribution with little in the center. This current condition presents a sustainable and broader environment that can carry on into the second half of the year and most likely for the next several years. Overall market valuation remains well within the fair value range (80% FV to 130% FV) at 94.3% FV. There is plenty of growth potential yet to come.