The S&P 1500 Index drifted lower the first seventeen days of August and then rebounded a bit to finish the month down just -1.73%. We contend that the market changed themes May 31, 2023 and believe that the small drop in August was just a pause or interruption to the new theme. Since May 31, the S&P 1500 Index is up 8.69% through September 1 and the top five sector indexes, all of which are beating the 1500, are: Energy, Industrials, Consumer Discretionary, Materials and Financials. This cyclical, economically sensitive leadership makes sense to our system based on valuations. Information Technology, which was leading the first five months of 2023, is lagging the broad market lately, which also makes sense to our system as it is difficult finding value there.
With the tightening of monetary policy by the Federal Reserve over the last seventeen months, there is plenty of debate over whether there will be a recession, soft landing or even no slow down at all and those views change monthly as data is released. We have not entered that debate. With a market value/price (V/P) of 1.04 and decent value in some of the recent leading industries, we would expect the market to move higher over the remainder of 2023. In a sense, more of what we have seen since May 31. The combination of value and strength that we find in some industries suggest their stock prices have the potential to move higher.
In August, we reduced exposure to Information Technology, Communication Services and Consumer Staples. We increased exposure to Industrials and Materials where we can find more value.
We expect the broad market to move higher for the rest of 2023. There is still some value in the new leadership, so we think their recent move is sustainable. In addition, we do not see the behaviors and extremes often seen at market peaks. As stated in August, we are cautiously trying to participate.
The data quoted represents past performance, which is no guarantee of future results. Opinions and forecasts regarding sectors, industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector.
Investing in securities involves inherent risks, including the risk that you can lose the value of your investment. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment. Investments in international securities may entail unique risks, including political, market, regulatory and currency risks. In general, there is less governmental supervision of foreign stock exchanges and securities brokers and issuers. Investing in fixed income securities such as bonds involves interest rate risk. When interest rates rise, the value of fixed income securities generally decreases.
Individual account holdings and composition may vary. Opinions and forecasts regarding sectors, industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector.
ICON’s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates and bond yields, in an effort to determine whether securities are over- or underpriced relative to ICON’s estimates of their intrinsic value. ICON’s value approach involves forward-looking statements and assumptions based on judgments and projections that are neither predictive nor guarantees of future results. Value readings are contingent on several variables including, without limitation, earnings, growth estimates, interest rates and overall market conditions. Although valuation readings serve as guidelines for our investment decisions, we retain the discretion to buy and sell securities that fall beyond these guidelines as needed. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies.
ICON’s value-to-price ratio is a ratio of the intrinsic value, as calculated using ICON’s proprietary valuation methodology, of a broad range of domestic and international securities within ICON’s system as compared to the current market price of those securities. According to our methodology, a V/P reading of 1.00 indicates stocks are priced at intrinsic value. We believe stocks with a V/P reading below 1.00 are overvalued while stocks with a V/P reading above 1.00 are undervalued. For example, we interpret a V/P reading of 1.15 to mean that for every $1.00 of market value, there is $1.15 of intrinsic value which has not yet been realized in the market price.
The unmanaged Standard & Poor’s Composite 1500 (S&P 1500) Index is a broad-based capitalization-weighted index comprising 1,500 stocks of Large-cap, Mid-cap, and Small-cap U.S. companies.
The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The CPIs are based on prices of food, clothing, shelter, fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living.
The 10-year yield is the benchmark 10-year yield to maturity reflected by the current issue 10 year U.S. Treasury note.
Sources: Bloomberg
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