Inside The Stock Market ...trends, cross-currents, and outlook

Our disciplines remain bullish, but we periodically wonder whether we’re being too cavalier in keeping our tactical portfolios “almost” fully-invested (at 65% equities) in the face of valuations that are higher than those seen in all but perhaps 24 months of stock market history.

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A look at the potential upside for the median S&P 500 stock, based on the theory that each of four valuation ratios reaches its individual all-time high set during the last phase of the 1990s’ market mania.

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One of our disappointments with the Group Selection (GS) Scores in 2016 was their failure to latch on to the rebound in Energy groups.

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Over the last 70 years, stocks have made no cumulative progress when Producer Price Inflation runs above 4%. Returns have been average when PPI inflation runs between 2% and 4%—where it is today.

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We should emphasize that any inflation pickup is likely to be a traditional, late-cycle phenomenon stemming from rising wage growth and rebounding commodity prices. We do not expect a secular move toward significantly higher inflation rates (say, north of 3.0%-3.5%).

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For managers who must remain fully invested in equities (or “paid to play,” as we’ve often called it), the level of inflation might prove a less important consideration than its character.

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Momentum factors are effective in differentiating EM sector performance, with High Momentum significantly outperforming Low Momentum. Unfortunately, there is a lack of investable EM sector vehicles.

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We think that stocks in Trump’s current term will fall short of Obama’s gains, mostly reflecting a valuation starting point that’s almost twice as high as Obama’s was. “Managing expectations” doesn’t seem like Trump’s style, but in the case of the stock market it might not be a bad idea.

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The Major Trend Index stabilized in a moderately bullish range during the past several weeks, yet the Momentum/Breadth/Divergence category is almost the sole carrier of the bullish torch.

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The S&P 500 trailing P/E has just climbed above 25x—lower than in March 2009—but incredibly high for any period in which earnings weren’t tainted by recession.

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Veteran market analyst Bob Farrell reminds investors that when parabolic uptrends eventually stop, the next move is never sideways. We don’t know that the Dividend Aristocrats and other bond-like stocks traced out a true parabola into last summer’s peaks, but the ugly aftermath suggests they probably did.

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The sell-off into last February’s low did not qualify as a bear market, but subsequent action—including the mayhem in “factor-land”—certainly suggests it was a very significant “psychological” low.

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Herein we provide a year-end update on the factors we determined were important to the active/passive relationship. We found that the market environment and the success of active managers changed significantly in late 2016.

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Tallying the overseas cash pile, predicting how much may be repatriated, and the potential impact on stock performance are challenging undertakings, which require more art than science.

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The above caption—and Jimmy Buffett song title—comes from the “View From The North Country” section in the first-ever Green Book published in November 1981. Not much has changed in 35 years.

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The S&P 500 closed the first week of January at a new cycle high, up 9.2% from the pre-election low made on November 4th.

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The less-well-known Stock Market Confidence survey from the Conference Board has poked into “excessively optimistic” territory for the first time since 2003

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We remain cyclically bullish, but it would be intellectually dishonest to try to make a serious valuation case for the stock market here.

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Stock market valuations certainly show no lack of investor confidence: each of our “Big Six” valuation measures now resides in either its ninth or tenth historical decile.

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The turn of the calendar seems to bring out the inner contrarian in some investors—those who will peruse last year’s list of lagging asset classes looking for rebound candidates.

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