U.S. Equity Market Chart Book

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1 U.S. Equity Market Chart Book April 2018 Nick Reece, CFA Senior Financial Analyst, Merk Investments LLC

2 .SPXFOR U Index (fred equ alloc).spx10yr U Index (annualized 10yr return... S&P 500 Valuation Indicator Aggregate Equity Allocation Proxy (From Fed Z.1 Report) and S&P 500 Subsequent 10 year annualized Returns This report may not modified or altered in any way. The BLOOMBERG PROFESSIONAL service and BLOOMBERG Data are owned and distributed locally by Bloomberg Finance LP ( BFLP ) and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the ( BFLP Countries ). Source: BFLPBloomberg, is a wholly-owned subsidiary Merk of Bloomberg Investments LP ( BLP ). BLP LLC provides ( BFLP with all the global marketing and operational support and service for the Services and distributes the Services either directly or through a non-bflp subsidiary in the BLP Countries. BFLP, BLP and their affiliates Bloomberg 04/13/ :35:17 2 If history is any guide, this chart suggests annualized S&P 500 returns (w/o dividends) might be close to 0% over the next ten years I d likely get positive on the longer term outlook for the S&P at an allocation below 30%, which would likely only be after a substantial bear market in the S&P

3 SPX Index (S&P 500 Index) LEI TOTL Index (Conference Board US Lead... USRINDEX Index (U.S. Recession Indicator... Business Cycle Backdrop Leading Economic Indicators (LEI) Index and S&P 500 LEIs continue to trend higher, historically a positive sign for stocks I d get incrementally negative on the outlook for the S&P if the LEI Index began trending down YoY while the S&P was at or near bull market highs Bloomberg 04/13/ :29:17 1

4 CPMINDX Index (China Manufacturing PMI S... MPMIJPMA Index (Nikkei Japan Manufacturi... NAPMPMI Index (ISM Manufacturing PMI SA) MPMIDEMA Index (Markit/BME Germany Manuf... SPX Index (S&P 500 Index) Global Growth Backdrop Large Economy Manufacturing PMIs (Purchasing Managers Index) and the S&P 500 Germany, China, and Japan manufacturing PMIs ticked lower in Feb, possible risk factor for stocks I d get incrementally negative on the S&P outlook if any of these PMIs fell below 50 Bloomberg 04/13/ :29:17 4

5 NFCIINDX Index (Chicago Fed National Fin... SPX Index (S&P 500 Index) U.S. Financial Conditions Chicago Fed National Financial Conditions Index and the S&P 500 Financial conditions continue to gradually tighten I d get more negative on the outlook for the S&P if conditions moved through the level Bloomberg 04/13/ :29:17 3

6 Chart - 3/13/2018.SPXATH U Index (breadth at ATH) Market Breadth Percent of S&P 500 member stocks above their 200d Moving Averages at New Bull Market Highs Breadth at the previous high (1/26/2018) was at 83%, historically breadth has been weaker at major market tops. Said differently, the breadth on 1/26/18 was not indicative of a major market top I d get incrementally negative on the outlook for the S&P if the S&P made new bull market highs with breadth below 65% Bloomberg 03/13/ :19:16 1

7 .BULVBEAR U Index (aaii bulls / (bulls +... SPX Index (S&P 500 Index) Market Sentiment Percent that are Bullish (bulls / bulls+bears) and S&P 500 Bullishness well below the long term average, In my view this chart should be looked at from a contrarian perspective, Therefore I m slightly positive on the S&P outlook near-term based on this picture Bloomberg 04/13/ :29:17 6

8 .MARGDEBT U Index (from margi... SPX Index (S&P 500 Index) Margin Debt / S&P 500 Index YoY RoC Margin Debt Margin Debt and S&P 500 (top panel), 12 month change in Ratio of Margin Debt / S&P 500 (bottom panel) Margin debt not rising relative to the stock market (bottom panel), perhaps supportive of the idea that the bull market has further to go I d get incrementally negative on the outlook for the S&P if YoY RoC of the ratio (bottom panel) moved above 40 Bloomberg 04/13/ :29:17 5

9 .SPXCORR5 U Index (rolling correlation (....SPXVOL5 U Index (rolling correlation (2... S&P Correlation and Volatility Avg. 2-yr Correlation of GICS Sector Indexes to the S&P 500 Index and Avg. GICS Sector Index 1-yr realized volatility Both correlation and volatility are relatively low in a longer term context, In my view this chart should be looked at from a contrarian perspective, and suggests a negative outlook medium-term Bloomberg 04/13/ :29:17 7

10 EPUCNUSD Index (US Economic Policy Uncer... SPX Index (S&P 500 Index) Uncertainty U.S. Economic Policy Uncertainty Index and S&P 500 In my view there is still some wall-of-worry left to climb I d get incrementally negative on the outlook for the S&P around the 50 level on policy uncertainty Bloomberg 04/13/ :29:17 9

11 VIX Curve Steepeness VIX Curve (3m futures implied VIX VIX spot) and S&P 500 VIX curve normally sloped (meaning future expected VIX is higher than current VIX), historically a positive sign for stocks (The VIX represents an estimate of the 30 day implied volatility of the S&P 500) Bloomberg 04/13/ :29:17 10

12 SPX Index (S&P 500 Index) Calendar Year S&P 500 Returns 1928-to-Present Calendar Year Returns (dividends not included) As of 4/13/2018 S&P 500 is -0.7% YTD. Coming into 2018 sell-side forecasts were for a 0-10% return this year. From the S&P 500 returned between 0-10% only 17% of years. 51% of years had returns above 10%, and 32% of years had negative returns Bloomberg 04/13/ :35:17 1

13 Scorecard Page Chart Time Horizon Characterization 2 Valuation Long Term Negative 3 LEIs Short/Medium Term Positive 4 Global growth Short/Medium Term Neutral/Positive 5 Financial Conditions Short/Medium Term Neutral/Positive 6 Market Breadth Medium/Longer Term Positive 7 Market Sentiment Short/Medium Term Positive 8 Margin Debt Medium/Longer Term Neutral/Positive 9 Correlations/Volatility Medium/Longer Term Negative 10 Uncertainty Medium/Longer Term Neutral/Positive 11 VIX Curve Short Term Positive

14 Conclusion/Thoughts Short to medium term I continue to be mostly positive on the major stock market indexes in the U.S.; however, I m cautious over the medium to longer term. My base case scenario remains that the S&P 500 makes new all time highs, getting above 2,873, before the next bear market, which for the purpose of clarity I ll define as a 25%+ drawdown over a six-month+ period. Specifically, the LEIs (p3) and the U.S. business cycle in general look very strong (see most recent business cycle chartbook). Also, the breadth (p6) at the last high, on 1/26/2018, was not indicative of a major market top in my view. Shorter term, the fact that the VIX curve is normally sloped is a positive sign for the S&P 500 to head higher. Also, the extreme stock market optimism that was a concern in January s report has reversed to extreme pessimism and should be incrementally supportive of stocks, from a contrarian standpoint. The overseas growth backdrop has continued to soften over the past couple months (p4); however, China s manufacturing PMI moved higher in the latest reading, having been very close to the 50 level. What keeps me cautious on the medium to longer-term (roughly 5-10 years) outlook is the low volatility and correlation picture (p9) and the relatively high equity allocation, which is a proxy for valuation and for expected returns over the subsequent ten years (p2). -Nick Reece, CFA

15 Disclosure This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Merk Investments LLC makes no representation regarding the advisability of investing in the products herein. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice and is not intended as an endorsement of any specific investment. The information contained herein is general in nature and is provided solely for educational and informational purposes. The information provided does not constitute legal, financial or tax advice. You should obtain advice specific to your circumstances from your own legal, financial and tax advisors. Past performance is no guarantee of future results. * * * Explicit permission must be obtained from Merk Investments LLC in order to replicate, copy, distribute or quote from this document or any portion thereof. Published by Merk Investments LLC 2018 Merk Investments LLC