By my Market Tracker, the SP 500 -- now around 1480 -- has
been fairly valued in a range of 1500 - 1550 since the latter
part of 2006. This is a broad range for the Tracker and it
reflects above average swings in analyst sentiment concerning
earnings prospects as well as continuing high volatility in
the inflation readings. At present, the Tracker is at the bottom
of its recent range for the SP 500 -- 1500.
The rally so far this year has carried the market closer to the
estimate of fair value. The strong surge in stock prices since
mid-2006 primarily reflects an upward adjustment in the earnings
capitalization rate reflecting the sharp drop of inflation pressure
since the middle of last year. SP 500 earnings are still seen as
rising this year, but the estimate is about 3% below the consensus
forecast for 2007 as of late 2006.
I am going to leave it here for the day, but will return to the subject
a few more times over the next several days as I figure out how best
to strategize with a foggy crystal ball.
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