S&P 500 Intrinsic Value Now At $1682

By Standard & Poor's, User:Stepshep (Vector taken from 1 coloring based off of 2) [Public domain], via Wikimedia Commons

S&P 500 Intrinsic Value Now At $1682

The Dallas Fed reported the 12 month Trimmed Mean PCE for November 2012 after the market close at 1.6%-see table. This lowers the “Prevailing Rate” to 4.62% and brings the “Intrinsic Value” of the S&P 500 (S&P Indices:.INX) to $1682 -see chart. The effect of falling inflation results in higher stock pricing all other things being unchanged.

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Inflation has been falling mainly due to the controlled spending of trillions of dollars injected by Chairman Ben Bernanke. Basically, most are hoarding these dollars as a safe haven against future uncertainty. The inflationary risk is unpredictable as should now be obvious by the many unfulfilled forecasts of higher inflation at this point in the economy. I think that all we can do is to monitor the data on a monthly basis and adjust portfolios as the risks become apparent. The market itself does not have a history of being correct in pricing inflationary expectations.

For the past several years inflationary fears have caused many investment funds to buy hard assets as a protective asset. The problem with this concentration in oil, gold, copper, land and etc is that inflation fears have not been realized while returns on these investments have stalled at low levels. History shows that falling inflation is beneficial for stocks while rising inflation causes stock prices to fall-see the chart history. More than half of theS&P 500 (S&P Indices:.INX) rise from 1982 thru 1997 was due to inflation falling from ~10% to ~2%.

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About the Author

valueplays
Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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