In 2016, both the U.S. and the U.K. stock markets tracked their historical patterns quite well but other international equity markets and non-equity markets tracked poorly.

There are certainly better catalysts this time that make a bear market a distinct possibility, but until a decisive break occurs (most likely when the 10-year gets above 3%), the bull market is still intact.

A look at various dynamics affecting sector results in 2016, and what we like going into 2017, both at the sector level and among groups.

After three consecutive years of positive performance, the Group Selection (GS) Scores struggled in 2016.

Long-term debt (LTD) issued by S&P 500 companies has risen 75% since 2010, and the resulting deterioration in leverage ratios has been all too evident.

CPI numbers were largely in line. There are encouraging signs that inflation is turning on a global basis. The path to sustained higher inflation is not going to be a smooth one and too much enthusiasm can prematurely end this reflation theme. We are encouraged by the general uptrend in inflation and inflation expectations but certainly do not want to take higher inflation as a given.

Companies are returning cash to investors at a level never before seen. Does the historically high level of cash being returned to shareholders crowd out the use of cash elsewhere? One wide-spread concern is that by shelling out cash through dividends and share buybacks, companies are spending less on capital expenditures. Is that a real concern?

Thanks to the U.S. dollar’s recent spike, foreign equities in dollar terms declined during November while the U.S. markets were celebrating a Trump victory. Thirty-nine of the 49 MSCI country indexes are in bear market territory from the perspective of a dollar-based investor.

We revisit our “Red Flag Indicator” of prior bull market tops versus today. Usually most of these internal market measures will deteriorate in advance of the final bull market peak. At the latest S&P high, three of the seven leading measures had raised Red Flags, by not confirming, but two of them (DJ Transports and the NYSE A/D Line), are within just ticks of new bull market highs.

Factor performance during 2016 is the reverse of that of 2014-2015. Quants and smart beta funds focusing solely on Value have enjoyed the year, while multi-factor approaches have struggled. Value has been the only factor that has provided positive performance this year.

Forces specifically driving many Financials groups include expectations for an ongoing yield rally and a steepening yield curve, tax cuts, and loosening financial regulation. While these outcomes remain largely speculation, the odds have improved and any of these developments would be a welcome change.

Market reaction since the election has been right on the money. What we didn’t expect was the speed and the magnitude of the so-called “Trump Trade."

· Headline CPI was in line but Core CPI missed.

The powerful prospect of a huge fiscal stimulus, a substantial tax cut and meaningful deregulation stoked hopes for higher growth and inflation. The Trump-induced reflation trade is still considered risk positive.  The market is putting a lot of faith in Trump’s new policy package but its actual impact on the economy remains to be seen.

Companies are returning cash to investors at a level never before seen. Counting dividend payouts and outstanding share repurchases, the amount of cash returned back to investors crossed the $1 trillion mark for the first time in January 2016 (based on trailing twelve-months’ total for the largest 500 companies, Chart 1).

Politicians bemoan the lack of “good-paying jobs,” but what’s the current perspective of employers? According to a simple measure developed by economist Edward Renshaw many decades ago, employers see a lack of “unused labor capacity” in the U.S. that should lead to yet another year of disappointing GDP growth in 2017.

In the June Green Book, we professed some skepticism surrounding the long-term, “low-risk” BUY signal for stocks that was triggered at the end of May by our Very Long Term (VLT) Momentum algorithm (also known as the Coppock Curve).

In mid-summer we suggested that attaining new market highs would probably require a rotation away from the long-time Low Volatility market leaders and into High Beta areas like Technology and industrial cyclicals.

We examine the recent strength in the Dow Jones Transportation Index and its underlying industries: Airlines, Railroads, Air Freight & Logistics, and Trucking.

· One bright spot in last month’s lackluster market action was that inflation sensitive assets saw impressive relative returns.

Also known as smart beta or strategic beta, factor investing has become the hottest portfolio management trend in the last five years. The smart beta space exceeds $600 billion in assets under management.