As of May 31, 2022, the price/fair value of a composite of the stocks covered by our equity analyst team was 0.87 times. Since 2011, on a monthly basis, there have only been a few other instances in which the markets have traded at such a large discount to our intrinsic valuation.
At the beginning of the year, we noted that the value category was the most attractive and that both core and growth stocks were overvalued. Value stocks have held up the best during the selloff as the Morningstar US Value Index increased 0.97% year to date through May. Most of the selloff occurred within the growth category; the Morningstar US Growth Index plummeted 28.39%.
According to our valuations, the growth category is now the most undervalued, trading at a 19% discount to our fair value, followed by the value category at an 8% discount and then core at a 6% discount. Across capitalization levels, we continue to see the best opportunities among small-cap stocks (19% discount), followed by large-cap (13% discount) and mid-cap (11% discount) stocks.
We recently lowered our projection for economic growth in 2022 to a 3.0% increase in gross domestic product growth from 3.5% and lowered our 2023 projection to 2.2% from 3.0%. However, while the economic growth rate may be slower, we continue to think that the probability of a near-term recession is relatively low.
n addition to lowering our forecast for economic growth, we also bumped up our forecast for inflation to a 5.2% increase in the personal consumption expenditure index from 4.5% this year. While the current rate of inflation remains high, we continue to project that inflation will begin to moderate in the second half of this year as supply chain disruptions ease and inflation runs up against high year-over-year comparisons. We forecast that inflation will moderate further in 2023 and drop below 2%.
On May 19, the CAPE ratio stood at 30.4. That is more than double the average CAPE ratio at all bear-market bottoms since 1900, according to an analysis by my firm, Hulbert Ratings, of bear markets included in a calendar maintained by Ned Davis Research. While some might think comparisons from so long ago aren’t relevant under current conditions, a comparison with more-recent decades yields a similar conclusion. The average CAPE ratio at bear-market bottoms over the past 50 years, for example, is still 17.0.