Normalized P/E

Donald Trump is thought to have been born with a silver spoon in his mouth, and the economic circumstances prevailing at his inauguration two years ago might have further perpetuated that view. The U.S. economy had already been in recovery mode for 7 1/2 years, and the bull market in U.S. stocks was about to celebrate its eighth birthday.

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It wouldn’t be a December Green Book without at least one page of hand-wringing over the year’s extreme underperformance of foreign stocks.

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We’ll never know how world events might have evolved had Mitt Romney won the presidential election in 2012. But thanks to the wonderment of Emerging Markets’ underperformance, we can go right back to the last days preceding that fateful election.

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We should emphasize that our characterization of stocks as dangerously overvalued applies only to the U.S. market.

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After a brief respite last year, EAFE has reverted to its old form by falling 300 basis points behind the S&P 500 so far in 2018. EAFE’s main transgression might simply be that it represents good relative value in a market that’s been rewarding only momentum...

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A review of Quality factors, as well as the lower valuations of High Quality stocks, supports the current High Quality cycle amid rising market volatility. The Leverage factor may provide particularly strong backing for High Quality stocks.

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The stock market’s nine-day decline off its January 26th high met our definition of an intermediate correction—an S&P 500 loss of between 7-12%.

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The Equal Weighted S&P 500 now trails the S&P 500 by 400 basis points YTD, and the rally is increasingly assailed as too narrow.

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We don’t have a strong capitalization-bet recommendation, other than to remind readers that Small Caps have been especially responsive to the favorable seasonal window that began November 1st (and which extends through April 30th).

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The milestones achieved by the current cyclical bull market have been so numerous that we hope you’ll forgive us for missing one back in May.

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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.

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One never appreciates what he or she has until it’s gone. In our case, during the many years it was freely available, we failed to appreciate the zero interest rate. Now that it’s gone, we already feel pressured to join a game where we (and very few others) have any edge: Fed-watching. Our real edge is that we recognize this.

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After two rough months moving into 2016, Low Quality stocks rallied and are now leading High Quality stocks YTD. Investors apparently brushed-off the slowdown scare from China, and later the Brexit headlines.

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Small Cap valuations may look better on a relative price-to-book basis, but we still believe their Normalized P/E ratios will suffer further compression before Small Caps reclaim the leadership baton.

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We’ve been correctly positioned near our tactical portfolios’ equity minimums, yet we’re oddly compelled to use this month’s “Of Special Interest” section as a very public second-guessing of that move.

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When the Fed surreptitiously began to tighten as we believe (via tapering), in January 2014, history suggested that Consumer Discretionary and Small Caps would be the most likely initial market victims (at least from a relative perspective).

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Foreign valuations experienced nowhere near the expansion enjoyed by U.S. stocks during the latest bull market, but their cheaper valuations rarely seem to inoculate them from outsized losses during corrections and bear markets.

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The Chinese government’s repeated stock market intervention attempts over the past several weeks have been remarkable, and obviously antithetical to the country’s move toward a more laissez faire corporate environment.

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