S&P 500 Intrinsic Value Update – ValueWalk Premium
S&P 500 Intrinsic Value

S&P 500 Intrinsic Value Update

“Davidson” submits:

Q1 2021 hedge fund letters, conferences and more

The Dallas Fed released the 12mo Trimmed Mean PCE of 1.67% which was higher than last month’s revised lower 1.60%. To the historical comparison of the SP500 and the Value Investor Index has been added the 100% trend line. Markets are driven by market psychology in response to earnings, social themes and other events at the time. Historically, recent peaks, 2000&2007, had Momentum peaks at 100% and 65% respectively. The current market reflects a high level of foreign investors involved in Momentum activity and a high level of economic stimulus by the current administration. There is no tool to estimate how high investors can drive prices with any degree of reliability.

S&P 500 Intrinsic Value

With this in mind, the Value Investor Index serves as a fundamental value indicator for the SP500 based on long-term Real GDP(the Real Private GDP is used), the long-term SP500 earnings trend and an inflation measure (12mo Trimmed Mean PCE). Extending the Value Investor Index and the 65% and 100% Premium trend lines to 2026 provide guesses based on past behavior of $6,650 and $8,000 for the SP500 respectively.

Are these reasonable estimates? Nothing is reasonable at Momentum driven market peaks! However, one cannot remain out of the markets for 5yrs-6yrs expecting a correction to permit getting back in at a reasonable price level when the liquidity is as high as we have currently and Momentum investors who have already demonstrated a willingness to pay any amount for news that was better than expected.

The recommendation is to stay invested in well-managed companies which represent the core US economy, the back-to-work economy. Momentum being what it is, is very likely to exit the very narrow field of favored growth issues which benefited from the COVID-19 lockdown and shift to emerging earnings trends in many out of favor issues favored by a normalized economy. Pricing can get well out of hand, but should persist till the next inverted yield curve. That level in 2026 could exceed $8,000 for the SP500. Keep in mind, this is pure guesswork. Even though there exists historical precedent, it does not mean that it will repeat.


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