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We are anticipating more volatility. Markets simply do not stay steady, predicable, and/or placid for extended periods. Moreover, the current environment, one marked by ample political volatility and but little market volatility, looks unsustainable to us. Something has to give at some point--and with stock prices running high, it seems to us that a correction is likely. Again, however, context is key. We see little likelihood of a significant downturn in excess of 15% and expect any correction to be a normal, even healthy intra-cycle move that would in fact create some potentially profitable buying opportunities--which have been in short supply over the last several months. We also see no rotations in long-term sector or style leadership and expect that the three reversals we have been talking about--with positive long-term returns for small-cap, value leading growth, and cyclicals beating defensives--will remain in place. In addition, the economic news is still positive, and the earnings outlook remains bright. In the meantime, 1Q17 is currently looking a lot like 3Q16 from a small-cap perspective--with small-cap growth and defensive sectors rebounding. To be sure, much is uncertain--but this uncertainty is not yet fully reflected in share prices. When that process begins, we are prepared to act.
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