Articles by Phil Segner, CFA Co-Portfolio Manager & Sr. Analyst

After spending the first ten months of 2016 under the long-term median premium of 3%, our Ratio of Ratios has bounced hard the past two months.

We had the best figures of the past seven quarters and put some downright awful numbers farther in the rearview mirror.

The S&P 500 gained 1.98% in December. Based on the 1957-to-date valuation metrics presented, the potential downside compared to its historical average widened by 1% from last month’s –20% reading.

A yuuuge market sell-off expected from a Trump win was somehow avoided. Instead of lumps of coal, visions of fiscal stimulus and favorable tax policies danced in traders’ heads. As interest rates dashed higher, the market had a very clear picture of who was naughty or nice.

Thanks to the November surge in Financials and Energy, Value stocks substantially widened their 2016 performance lead over Growth. This has pushed our L3000 median valuation for Small Cap Value stocks to levels not seen since the late 1990s.

Robust Small Cap outperformance in November pushed our Ratio of Ratios back to its long-term median—a 3% Small Cap premium.

Our “two-month” Up/Down Ratio for Q3 tallies up to 1.37. This is the strongest “two-month” reading of the past seven quarters.

The S&P 500 gained 3.70% in November. Based on the 1957-to-date valuation metrics presented, the potential downside to its historical average widened by 1% from last month’s –19% reading.

The S&P 500 drifted gently lower in October as election uncertainty crowded out the story of a much better than expected start to Q3 earnings. The S&P 500 closed the month only 3% from its all-time high set in August.

Growth stocks, especially in the Small Cap tier, received an outsized punishment compared to Value. Looking at historical valuations, Growth remains cheap compared to Value.

Small Caps are selling at a 4% discount to Large Caps. Our Ratio of Ratios logged the sixth consecutive month of Small Caps sitting in the discount zone.

Our initial Up/Down Ratio for Q3 sports a reading of 1.78. This “one-month” reading is the highest its been in seven quarters.

The S&P 500 has quietly put together a string of four consecutive modestly-positive quarters—up nearly 13% for that stretch. Volatility in the most recent quarter was almost non-existent. The only sector not trading with a LTM P/E above its five-year median is Consumer Discretionary.

Growth remains especially cheap relative to Value in Small Caps and our Royal Blue segment. Small Cap Growth was the best performing segment for Q3 (+9.2%).

Matching our 13-year low made last month, our Ratio of Ratios shows Small Caps at a 6% discount to Large Caps using non-normalized trailing operating earnings.

Our final Up/Down Ratio for Q2 sports a reading of 1.22. As was the case the two previous months, our final number is the highest since the first quarter of 2015.

We made it through the entire month of August without a 1% daily move (in either direction) for the S&P 500. We have to go back to July 8th, 42 trading days, to find the last 1% move. This is the sixth longest streak without a 1% move since 1979.

Value stocks edged out Growth in each market cap segment. Small and Mid Cap Value remain the best performing segments YTD, up 14.6% and 13.2%, respectively.

Our Ratio of Ratios made a fresh 13-year low in August. Small Caps are now selling at a 6% valuation discount using non-normalized trailing operating earnings.