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While 2016 is shaping up to be one of the most difficult years ever (on a relative basis) for active equity managers, one cannot blame the usual culprit of “narrow” market participation.

When we complain about the stock market’s inflated valuation levels, we’re unintentionally giving short shrift to the 50% of the global-market capitalization that resides outside the U.S. We’d be hard-pressed to describe the valuation of Developed foreign markets as any higher than neutral.

So long as one maintains a “nationalistic” perspective, Financial sector indicators support a bullish view toward both the economy and stock market.

A few months ago, we mentioned the valuation risks that had built up in the stodgy Utilities sector, which at its mid-summer peak commanded a trailing P/E multiple of 24x—almost 10 points above its 1990-to-date median of 14.7x.

For months we’ve speculated that any major extension of the bull market would require a rotation into High Beta groups from the Low Volatility and economically-defensive themes that were the market’s big winners from mid-2015 to mid-2016.

Despite a two-month stall in the blue chips, the breadth and momentum behind the market’s rally off mid-February lows remain hard to deny.

If the above observation from almost a century ago remains on the mark (as it has for almost a century), then both the cyclical bull market and accompanying economic expansion should remain in force during the next several months.

We examine the factor category strength behind Auto Parts & Equipment, Household Durables, and Paper Packaging. Each of these groups has rated Attractive or High Neutral for two consecutive months.

A look at Health Care groups’ historical performance both pre-election and post-election; we identify past trends of leaders and laggards in each period.

Value, Growth, and Profitability were all negative, while Momentum turned around its recent negative performance streak.

Although the spread cushion is thinner than it was a couple years ago, these bonds still offer the attractive combination of quality and spread.

We maintain our favorable view towards spread products within fixed income, but given the election and the Fed hike risk, caution is warranted.

The upcoming election is likely to have wide-ranging impacts on both monetary and fiscal policies and we expect election risk to overshadow the Fed policy risk for the time being.

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.

A client inquiry led us to take a fresh look at the relationship between current valuations and subsequent stock market returns, which is a regular feature in our Benchmarks publication.

Overall, this work supports a constructive intermediate-term stance toward stocks; our tactical portfolios are positioned with equity exposure of 63%—a posture we consider aggressive given the relative maturity of both the economic expansion and the cyclical bull market.

Bond mutual funds, bond ETFs, and domestic-focused equity ETFs are the only categories registering material positive cash flows YTD.