S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

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1 I hope that everyone is off to a great start to As you know, each year I put together a set of ten predictions for the New Year. Some have to do with the markets, some the economy and taxes and a few of the predictions are on sports and entertainment. Just a little fun in the New Year and a way for everyone to know what I am thinking. So here goes in my attempt at predicting the future, 2017 style. 1. January is off to a back and forth start here in 2017, but I expect the major market indexes (Dow Jones Industrial and S&P 500) to hit new all-time highs repeatedly in In my opinion, high single digit to double digit returns are likely to occur as over the last 50 years of history when the value of the US dollar increases, as it did in 2016 (a gain of 3.8%), the market has nearly always increased the following year. (Reuters) 2. If the Federal Reserve increases interest rates two to three times in 2017 I believe it will not negatively affect the Dow Jones. Many believe that the Federal Reserve will increase interest rates this year, but there is consistent worry that the stock market will struggle if this occurs. Consider the reasons why the Federal Reserve increases rates. Rates are increased because the Fed believes that the economy is getting better and so therefore uses rate increases to slow down the advancing economic growth a bit in an effort to held down potential inflation. (Investment News) So increasing rates is a sign of a stronger economy, which today is a good thing. In our case today even if the Federal Reserve increased interest rates.25% three times the rates would still be incredibly low by historical standards. I hardly think that walking into a bank or credit union and now getting 2% versus 1.25% on an FDIC Insured Certificate of Deposit is going to change someone s mind to invest in a CD versus stocks or real estate. Keep it all in perspective and remember that in 2000 local banks and credit unions were offering one year CDs at 7% and five year CDs at 7.5% (Reuters) and not many people wanted them. That clearly was a sign that stocks had become overvalued. Today banks are offering 1.25% on CDs and many are taking this rate versus investing in stocks. (Reuters) It is hard to believe that the markets are in a bubble when people are willing to take such low rates on guaranteed investments. If rates were today where they were in 2000 at 7% plus then I would be more convinced of a stock market bubble.. 3. The New England Patriots will play and defeat the Atlanta Falcons to capture the NFL Championship. The Golden State Warriors will play and defeat the Cleveland Cavaliers and bring the Championship back to Oakland. The Los

2 Angeles Dodgers will play and defeat the Kansas City Royals in the World Series. In college basketball, the Gonzaga Zags will play and defeat the West Virginia Mountaineers in the NCAA Basketball Championship. 4. The country will once again avoid recession and will not incur a 10% correction at any point in the year. The markets appear to be experiencing the same type of phenomena at present with Donald Trump s Presidential victory as they did when Ronald Reagan took office. Consider a statistic that is very interesting to say the least. In 1998 the Dow Jones crossed 10,000 for the first time. Now nineteen years later the Dow has crossed 20,000 for the first time ever. This is a rate of return of 3.6% a year for the Dow Jones over the last nineteen years. Historically the Dow has returned 10% per annum and so a 3.6% rate of return over the last nineteen years is absolutely terrible. When is the last time that the Dow Jones had such a crummy lengthy under-performance over an extended period of time? Drumroll please, During these nineteen years the Dow Jones averaged 3.4% a year. In 1982 Ronald Reagan comes into office with some very different ways and policies and society begins to view the economic glass as half full versus half empty and the Dow Jones goes onto returned 17.5% a year from This magnificent run for the market was through both Republican and Democratic Presidents and Congress. Remember that the markets tend to be very cyclical and when under-performance occurs for a lengthy period of time, history has shown that an out-performance for significant period of time follows. I strongly suspect that we are on the cusp of another similar run of over the next fifteen years or so. (Dow Jones Industrial Average) 5. I think that Europe and Asia will be back in the headlines again in 2017, but this time because the Asian and European markets begin to decisively outperform the United States after several years of trailing in returns. We have noticed in the United States that the Dow Jones has been doing quite well over the past several years, but international markets have not followed suit. In fact, the MSCI Index EAFE or World Index SM which tracks all major developed world markets (excluding the United States) has only returned around 5% per year over the last five years. By comparison the Dow Jones has returned slightly more than double this figure. (DJIA) Historically speaking, quite regularly when you see the United States outperforming the international markets for extended periods of time (or vice-versa) the cycle shifts and begins to move the other way. We are already starting to see this in 2017 with the Dow Jones up less than 1% for the year and the MSCI (World Index) up 3.2% on the year. For all of those diversified portfolios with United States and foreign investments that have trailed the market returns here in the United States, I think vindication is right around the corner. Stay with diversification versus chasing market indices (Dow Jones, S&P 500, etc.) as diversification is a time tested proven strategy and works best over time. (Reuters)

3 6. For 2017 here is what I am looking for: Best Picture Manchester by the Sea, Best Actor Casey Affleck (Manchester by the Sea), Best Actress Emma Stone (La La Land) and Best Director Damien Chazelle (La La Land) 7. Look for the residential real estate market to begin to slow down somewhat in Higher interest rates and the industry being back towards full employment will make it tougher for places like Denver, Portland and Nashville to experience over 10% appreciation like they did in Even look for some areas like San Francisco and Los Angeles to actually experience a decline in value as prices have become way out of whack. 8. Expect for Obamacare to continue on as currently structured. While the Trump administration has made it abundantly clear that they want to make major and significant changes to the plan, the likelihood is that these adjustments will not come until 2018 at the earliest. Even if changes do take place then look for the new plan to have a lot of similarity with the current. The major difference will be more competition (across state lines) to help drive down the price of the policies and then in turn the Government subsidies. This could have a direct positive affect on the markets and on the pharma and managed health care arena, in particular. I suspect that the Pharma and biotechnology industry are going to do much better than many expect (given the recent Trump rhetoric on drug prices being too high). 9. I am looking for a reduction in Corporate Tax Rates from the current 35% to 20% and maybe as low as 15%. Additionally I predict that the Top Federal Tax rate will be reduced from the current 39.6% to 30% and maybe as low as 25%. Additionally after many years of corporate earnings being kept overseas to avoid US taxation, these monies will come back to the United States and be taxed in the form of a one-time fee. With these monies being brought back to the United States the amount of share buybacks of US corporations will be a new record and help to propel the Dow Jones near a closing price of 22,000 by year-end. 10. If interest rates are on the rise and valuation at record highs and yields near record lows, utility stocks will have a very difficult Additionally Municipal Bonds and many other fixed income investments will struggle immensely as rates rise and the stock markets continue to gain steam. The great unwind of bonds moving into stocks will begin. Another pressure on Municipal Bonds will be top tier Federal Income Tax brackets being reduced. Municipal Bonds will become far less attractive with low income tax rates and this is something that I don t think many people have considered.

4 I can't wait to catch up with everyone as the New Year continues to move forward. I m excited for us to keep building on the momentum of the last several months and I think that we are starting to turn the corner into a very good next ten to fifteen years for the markets. These markets have gone quite a long time with very slow progress, but I think that we are truly going to experience returns that are far more consistent with history going forward. As always, I greatly appreciate your trust and confidence and do not, and will not ever, take it for granted. Happy New Year and wish everyone an awesome Shawn Shawn E. Neighbor Morgan Stanley Wealth Management Executive Director Senior Portfolio Management Director Financial Advisor NMLS # Town Center Way Suite 902 Newport News, VA The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Dow Jones Industrial Average is a price-weighted index of the 30 blue-chip stocks and serves as a measure of the U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. An investment cannot be made directly in a market index. S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. As of May 30, 2011, the MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

5 The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of May , the MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. An investment cannot be made directly in a market index Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio. Morgan Stanley Smith Barney LLC. Member SIPC