U.S. Largecap Sector Relative Fair Values: Wednesday, September 14, 2016


Significant Changes Since Last Week:

Yesterday, I was switching back and forth between CNBC, Bloomberg and BBC to hear how each of the networks interpreted the swings in the market over the past several days. I was not surprised to hear everything ranging from direction from the Fed, lack of direction from the Fed, the Fed is clear to make a move before year-end, the Fed is uncertain about making a move before year-end, poor showing at the U.S. 30 year bond auction, BREXIT (yes, still alive as an excuse) and of course, the all-time favorite, peanut butter sales trends (my favorite term for guessing). It was absolutely clear that the “experts” were guessing and groping at anything that might give a hint of why such large swings were occurring. They had no clue. I guess if you are a minute-by-minute investor the “expert analysis” of this nature would be meaningful and assist in moving in and out of the market in rapid succession. I’m not sure you would have made any money in the process.

However, if you are attempting to gain some insight on how the market will be developing over the next several years, I think we have some thoughts. First, the economy continues to move in the slow-n-steady direction of gradually upward. Yes, people can find occurrences where any data set has not moved in a continuous upward direction, but then again, it never does. Overall, economic data for the U.S. economy has moved slowly upward and more recently, even income. It is a bit softer than previously, but improving. Second, we reached 100% Fair Value (FV) earlier this month and even with all of the gyrations of the past 7 days we only moved off of that point by 2.4 percentage points.


Third, all three capitalization categories are closer to each other in terms of valuation than ever before at a spread of 2.7 percentage points. Why is this important? Generally, when any class of stocks gets too far ahead of the other class an “adjustment” occurs. In this case, they are actually moving closer together.

Even sector valuations are improving. No single Largecap sector is below 90% FV and even Utilities is not racing above everyone else. Only one Midcap sector is below 90% FV and it is only 0.9 percentage points below 90%FV. This is true for Smallcap as well and it is the same sector, Telecommunications.


Traditionally, speculative sectors such as Consumer Discretionary or Information Technology are not the sectors leading valuations. It is the more stable side of the isle with Materials, Industrials and Utilities. Utilities are certainly gaining some advantage from dividend generation but the overall stability side of the equation is comforting.

U.S. Allcap Industry Relative Fair Values

All of the industry groups moved lower for the week. However, it was not as dramatic as you might guess. Only one group, Pharmaceuticals & Biotechnology is below 90% FV to 88.4% but it has been in that condition for most of the year. Last week it was at 89.5% FV so the move was only 1.1 percentage points down.

The one condition that seems to be exerting downward pressure on an otherwise reasonable marketplace and that is the off-center debt market. Bonds globally are at record low yields and over 20% of the sovereign bond market is at negative yields. The governments around the world are getting frustrated at the fact the population is not willing to leverage themselves and borrow heavily. The economy has adjusted to being more in balance with real demand and not unrealistic expectations. If only the governments would realize this is OK.


What will happen going forward is more of a concern for the bond market. Any surprise will certainly impact the stock market but, right now it appears that the less risky side of the equation is favoring stocks.