ATALEOFTWOMARKETS:RISKONORRISKOFF?

Itwasthebestoftime,itwastheworstoftimes

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ATaleofTwoCities(Markets)

¨ "Itwasthebestoftimes,itwastheworstoftimes,itwastheageofwisdom,itwastheageoffoolishness,itwastheepochofbelief,itwastheepochofincredulity,itwastheseasonofLight,itwastheseasonofDarkness,itwasthespringofhope,itwasthewinterofdespair,wehadeverythingbeforeus,wehadnothingbeforeus,wewereallgoingdirecttoHeaven,wewereallgoingdirecttheotherway.”

¨ Whiledisagreementamongmarketparticipantshasalwaysbeenafeatureofmarkets,seldomhastherebeensuchadividebetweenthosewhobelievethatweareonthevergeofamassivecorrectionandthosewhoequallyvehementlyfeelthatthisisthecuspofanewbullmarket,andbetweenthosewhoseeunprecedentedeconomicandpolicyuncertaintyandmarketindicatorsthatsuggesttheexactopposite.

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EquityRisk:TheDivergence

¨ Riskoff:MarketIndicatorsofriskincludingtheVolatilityindices,bondyieldvolatilityanddefaultspreadsarealldownsignificantlysinceNovember2016.

¨ Riskon:MeasuresofeconomicpolicyuncertaintyhavespikedsinceNovember2016.

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StockMarketVolatility

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EconomicPolicyUncertainty

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FundFlow

¨ Theultimatemeasureofhowcomfortableinvestorsfeelaboutriskiswhethertheyareputtingmoneyintostocksortakingthemoutandfundflowshavehistoricallybeenagoodmeasureofthatcomfort.

¨ Putsimply,ifinvestorsarewaryandriskaverseaboutanassetclassormarket,youshouldexpecttoseemoneyflowoutofthatmarketandiftheyaresanguine,youshouldseemoneyflowin.

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Fundsin?

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Fundsout?

¨ Theperennialmarketbearshavebecomeevenmorebearish,withconcernsaboutmacroeconomicriskaugmentingtheirlong-standingconcernsaboutstockstradingathighPEratios.

¨ Therearebignameinvestorswhoarecautioningthatamarketcorrectionisaroundthecorner,withJeffGundlach beingthelatesttoarguethatitis timetoselltheS&P500andbuyemergingmarketstocks.

¨ ThereissomeevidencethatmoneyisleavingUSstocks,withtheWallStreetJournalreportingthatmoneygoingintoUSstocksisata9-yearlow,whileinflowsintoEuropeanstockshitafive-yearhigh.

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Confidenceup,Spendingmeh!

¨ Ultimately,riskdoesnotcomefrommarketperceptionsornewslettersbutisreflectedinconsumerandbusinessmoodandbehavior.

¨ Themoodindicators(consumerandbusinessconfidence)areflashinggreen.

¨ Thespendingindicators(consumerspendingandbusinessinvestment)arenotshowingthesamerobustgrowth.

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ConsumerConfidence

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ConsumerSpending

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ExplainingtheDivergence

¨ Marketshavebecomeinuredtocrises:Investors,afteradecadeofmarketcrisisaftermarketcrisis,havelearnedtorollwiththepunchesandignoreexpertswhopredictdoom.

¨ Disagreementabouteconomicpolicychanges/effects:Itisalsopossiblethateconomicpunditsandinvestorsarepartingwaysonboththelikelihoodofeconomicpolicyshocksand/ortheconsequences.

¨ Politicsfirst,analysislater:Itisnosecretthatweliveinpartisantimes,andinvestingincreasinglyreflectspoliticalpartisanship.

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Mytiebreaker:TheImpliedERPonJune1,2017

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Inperspective..