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A massive drop in corporate tax payments lifted the third quarter NIPA profit margin back to the 10% level for the first time four years. But while we try not to always view the glass as half empty, we find it troubling that margins remain well-below their 2012 highs (10.6%) in spite of this one-time windfall.

While the improvement in the fundamental categories is encouraging, the weight of the evidence continues to support a cyclically defensive stance toward the stock market.

Whatever one’s preferred leftovers from yesterday’s feast, the odds are good you’ll find them more appetizing than the slop served up by global asset markets this year. Stocks have obviously been turkeys, but all the surrounding trimmings that help diversify a portfolio have proven anything but complementary to the main course.

A critical difference we’ve discussed repeatedly is that market overvaluation in the 1999/2000 episode was concentrated in roughly the top-50 Mega Caps, while current overvaluation—though arguably not as extreme—afflicts nearly the entire list of publicly-traded U.S. stocks.

While the consensus view remains that October’s stock market rout was “healthy” and “overdue,” we think it was  more likely the first leg down of much larger decline. But it’s still worth reviewing the improvement in valuations that market losses and this year’s excellent fundamentals have combined to produce.  

Asset Allocation in 2018 is about as bad as it gets. No major asset class has done well.

We wrote in October’s Green Book that “many once reliable seasonal market patterns have been out of sync in recent years.” The market gods punished us for having the audacity to write such a thing (and during October, of all months!), taking the S&P 500 down to within 0.1% of “correction territory” at the October 29th low. But the punishment outside the U.S. commenced long beforehand, and last month’s losses drove several foreign market measures into bear territory. We expect U.S. blue chips to follow.

Although the Intrinsic Value category is now about 100 points above the worst levels recorded in early January, it is far too early to begin making a bullish valuation case for the stock market. Interestingly, some of the same pundits who warned “valuation is not a timing tool” on the way up are the ones trotting out these premature, value-based arguments—which are typically built on extremely-optimistic forecasts for 2019 operating EPS.

Doubling of yields since 2016 has slammed households. Percentage increase in rates is more important than the absolute level.

In the March Green Book, we discussed the long history of stock market difficulties during mid-term election years. Incredibly, nine of the past 11 cyclical bear market lows have occurred in these years, with eight of those nine recorded during the seasonally-weak months of May through October (Table 1).

“Zombie” companies are being kept alive by low interest rates and generous credit conditions, and the number of them, worldwide, has risen significantly over the past few years.

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.

While this year’s liquidity squeeze has yet to exact the toll we ultimately expect on the U.S. stock mar-ket, it has certainly contributed to a sharp compression in P/E multiples.

During 2018, no major asset class has done well, and in most respects the opportunity-set available this year has been among the worst in the last 50 years.

We believe stocks have begun to discount a major inflection point in the economy and corporate profits for 2019 and 2020.

Having devoted all of our professional lives to the monitoring and modeling of equity markets, we’re naturally ticked off that this year’s best stock market signals have in fact been rendered by bonds.

A couple of months ago, we (belatedly) observed that, in February the 10-year Treasury yield had bro-ken above its 10-year moving average. That simplistic tool has been a pretty good descriptor of yields’ long-term trend for more than a century, with few “whipsaw” signals along the way.

Whether or not they’ve risen for the “right” reasons remains up for debate, but the upward move in interest rates has hit the usual suspects very hard in 2018, like early-cycle industries and Emerging Markets.

Taking a cue from the White House, today’s market pundits seem more prone to declarative, unsubstantiated statements than we can ever remember.

We wrote in October’s Green Book that “many once reliable seasonal market patterns have been out of sync in recent years.”