Train Etiquette. By John M Robards CFA. VP-Wealth Management. International Client Advisor. March 8, 2017

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1 Train Etiquette By John M Robards CFA VP-Wealth Management International Client Advisor March 8, 2017 I am a big believer in proper train etiquette, but I am definitely in the minority. I take the train most workdays between Westchester County and Manhattan, and whenever I want to sit in an empty seat next to another passenger, I always ask, Excuse me, do you mind if I sit here? The reactions I get are all over the place. A slight majority merely make a polite response, although about half the time the response is Yes with some type of body language indicating that their yes answer means I am free to sit there, not that they do, in fact, mind if I occupy the seat. Sometimes I get a look of complete shock that I would even ask. It has happened on more than one occasion that the passenger looks at me like I have just spat in his coffee and then turns away with a scowl on his face. It is as if the rules of etiquette are suspended, for many, when they board a commuter train. When the situation is reversed, and I am the one sitting with an empty seat next to me, the other person almost never asks if I would mind if they sat next to me, and it is extremely rare for someone to even say excuse me. I always sit in an aisle seat, meaning that I must stand up to enable someone to sit next to me. The most often move is the point-and-grunt, or even the silent point, in which the prospective sitter gestures at the empty seat and expects me to stand up and let him past. I am always tempted to say Can I help you? in order to force the person to articulate their request to sit next to me. I usually let them off the hook, knowing that my requiring them to actually speak would be taken as a hostile or passive-aggressive act. Last week, a man stood over me and silently glared, not even pointing, until I stood up, which I did in a slow, deliberate, slightly menacing fashion, never breaking eye contact. Once in the last few months, a man never stopped moving, never gave me a chance to stand up or even move my feet out of the way, climbing over my sitting body and stepping on my freshly-shined shoes. It seems lately as though many have decided that the rules of etiquette have been suspended when it comes to politics as well. Readers of my newsletters may have noticed

2 that I have not written one since October, right before the election. In that issue, I predicted that there could be some volatility associated with the election, and I referred to the GIC s Mike Wilson, agreeing with his opinion that any weakness should be used to add to market exposure. Unfortunately, the weakness was so short-lived that most investors did not even have time to react. Awakening on my couch shortly after midnight on election night to the news that the networks were calling the election for Trump, I also learned that the overseas markets were down sharply and the futures were predicting a drop of about 900 points on the Dow Jones Industrial Average when the US market opened the next morning. I moved from couch to bed and fell asleep again with the comforting thought that I would have great prices at which to put cash to work the next day. Unfortunately, by the time the US stock market opened the next morning, not only was the Dow not 900 points lower, it was not even lower at all. The market opened higher that morning and embarked upon one of the most spirited rallies we have seen in years. The buy the dips strategy, employed by so many, has been ineffective because the dips since Election Day have all been so shallow. Worse yet, many hedge funds and professional investors have actually had short positions, or bets that the underlying stock or index would decline. George Soros, for one, seems to have bet millions (or even hundreds of millions) against the US stock markets, according to published reports, including this one by CNBC: Those short positions and cash have probably provided further fuel to the rally, as these negatively positioned investors have scrambled to buy back into the market. The months-long absence of a new issue of my newsletter has been due to a paralysis on my part that stems from complete shock at the turn of events since the election. My greatest shock has been at the extensive collapse of civility on the part of so many that I know, on both sides of the political spectrum. Many of those who backed Trump have been gloating, and a tremendous number of my friends who opposed him have been spewing venom over the outcome. It has seemed, at times, as though everyone has gone a bit crazy over the unexpected nature of the political outcomes. I have tried to maintain neutrality, expressing hope that the new administration will succeed in its stated goal of making America great again, and as a result, I have been attacked by both sides. Meanwhile, the stock market has made a series of new highs, with the Dow recently topping the milestones of 20,000 and 21,000 since the year began. An observer might look at this action and conclude that the stock market is celebrating the dysfunction that

3 has ensued following the election, that the market likes this lack of civility. That seems so counterintuitive that one must ask: How could this be happening? The old saying is that Bull markets climb walls of worry, and there is still no shortage of things to worry about. Top of the list is political discord, with one side accusing the other of being involved in a Russian plot to influence the election, and the other side calling for investigations into voter fraud and declaring that the previous administration had tapped his campaign s phones. Add to those the scary news continuing to come out of North Korea, tensions with China, political uncertainty in Europe, worries that the Federal Reserve will blow up the economy by mismanaging monetary policy, and the continued possibility of terrorist attacks both here and abroad. Clients have expressed wonder to me that the market is not falling precipitously. But it is not falling much, if at all. Since making its intra-day high of on March 1 st, the S&P500 index has had a mostly sideways-to-slightly-lower consolidation, closing today at , a drop of only 1.6%. That type of strength, coming after the market has made new all-time highs, is often taken by technical analysts as a sign of underlying health in the stock market. Morgan Stanley s Global Investment Committee (GIC) maintains a positive outlook. In some comments reiterated on March 7 from a piece entitled, Are you ready for Euphoria?, Chief Investment Strategist Mike Wilson wrote: There continues to be a disproportionate amount of attention on political events/news. We think it makes more sense to focus on the four pillars of this aging bull market accelerating growth, valuation, sentiment/positioning, and market technicals which all remain supportive of our more constructive outlook for global equities. Here s a link to Mike s recent monthly commentary, which is full of slides supporting his view: Let s examine those four pillars: 1) Accelerating growth: Here are four charts that make the case that this is happening now:

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5 2) Valuation: Another slide from the GIC: This slide shows one estimate of Fair Value for the stock market by discounting the S&P500 estimated earnings by the BAA bond yield. Note how overvalued the market was at the peak of the technology bubble in , according to this indicator. 3) Sentiment/positioning: this pillar had been showing some signs of weakness, as some of the sentiment polls recently revealed that investors had definitely become more bullish (complacent) than they were just a couple of months ago. It seems that the recent sideways-to-slightly-down consolidation appears to have done much to correct that condition. The American Association of Individual Investors sentiment poll released today (3/8/2017) shows that among their members, the percentage of those saying they are bullish fell from 37.9% to 30% in the last week:

6 4) Market Technicals: Here is another chart from the GIC: Many watch the cumulative advance/decline line for the S&P500 for signs that the market is rolling over. This does not appear to be the case, based on this indicator. Taking into account all of the above, it appears that it may be premature to expect the stock market to have a meaningful selloff. Nevertheless, having recently made new highs, investors can t be faulted for wanting to take some risk out of their portfolios. The US Treasury 10-year bond closed today with a yield of 2.552%, up significantly from its low of 1.336% last summer, making bonds more attractive than they were then. With German and Japanese bonds yielding significantly less, demand from global investors may keep US bond yields from moving much higher. As such, re-allocating slightly from stocks back towards bonds might not be the worst idea. If done incrementally, in small steps, investors can slowly de-risk their portfolios while still maintaining their exposure to equities as the stock market continues to make new highs. As we all should know, those new highs can continue to be reached until they no longer are.

7 But above all, remember to maintain a calm head, and observe proper etiquette, even as those around you do neither. 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. S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index. 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.