Morgan Stanley Quarterly Conference Call January 29 th, 2018 The Citrus Group at Morgan Stanley CRC 2004847
Overview Introduction Fixed Income - 4th Quarter and 2017 Recap - Outlook Equities - 4th Quarter and 2017 Recap - Outlook Conclusions Looking Forward Tax Resources 1
Where We Were Fixed Income This chart illustrates the difference between shorter-term yields and longer term yields. In December 2015, the time of the first of five Fed Funds rate increases, the difference between US Treasuries at 10yr (2.30%) and 2yr (.53%) was more than 1.75%. This spread has decreased to nearly.52%. The result is a very flat yield curve. - Source: Bloomberg, Morgan Stanley Wealth Mgmt GIC The Federal Reserve raised the overnight borrowing rate for the 5 th time December 2015 December 2017
Trends for Interest Rates from our December 30 th,2017 Monthly Newsletter Our outlook on interest rates has not changed. Many investment professionals have pointed to signs of inflation during the year. The Federal Reserve felt there was enough evidence to support another rate.25% hike in December. Since the financial crisis, the Federal Reserve has raised the overnight borrowing rate 5 times, each at.25%. This has not translated to higher rates across all maturities. The impact of raising rates on the short-end of the curve has caused a flattening. -Morgan Stanley Wealth Management 9/30/2017 Longer-term rates have moved to the higher end of their range and we would not be surprised to see the 10yr US Treasury test resistance at 2.60%. This move higher would not have any impact to our longer-term projections for rates to continue to trend lower. - Source: Bloomberg, Morgan Stanley Wealth Mgmt GIC 3
Positioning Fixed Income from our August 31st, 2017 Monthly Newsletter Last month in our July newsletter we referenced Alan Greenspan, the former chairman of the Federal Reserve, about why investors who are concerned about a stock market should instead be worried about bonds. The real problem is that when the bond-market bubble collapses, long-term rates will rise. Moreover, on 9/2/2017, the Barron s cover had the following caption; After an eightyear climb, stocks are pricey, rates are rising, and the world is in turmoil. Our guide to spotting the turn. Is this fake news? In our opinion, it is at least very misleading. Identifying and Managing Risk -Source: Bloomberg, Morgan Stanley Wealth Mgmt GIC -Source: Bloomberg, Morgan Stanley Wealth Mgmt GIC -Source: Bloomberg, Morgan Stanley Wealth Mgmt GIC 4
Where We Were Equities To best recap 2017, we need to go further back than our last conference call Our indicators are presently giving us a more optimistic outlook for equities than we have had since mid-2015. This November, increased volume and investor confidence rewarded equity investors. This move was substantial enough for us to confirm our intermediate (3-6 months) outlook was turning positive. Market rotation, improved breadth from mid and small-caps, and a confirmation from the Transportation Index quickly caused more follow-through as the primary trend was confirmed higher also. Quantifying market activity allows measurement and comparison. Animal spirits, human behavior, and black swans are difficult (if not impossible) to predict. Our analysis should never predict a bottom, but should identify a trend. This is where we believe we are... We are happy to be currently aligned with the consensus of most fundamental analysts... Risk management in place, we hope this may be the start (or continuation) of the next big thing. 5
4 th Quarter for Equities Confirmation of the Trend Comparing DJ TRANSPORTS to DJ INDUSTRIALS our analysis confirms a positive trend using Dow Theory. 7/1/2016 12/312017 Source: Thompson Reuters Comparing the strength in Small-Cap (S&P 600) and Large Caps (S&P 500) helps to confirm the bullish primary trend for equities. 7/1/2016 12/31/2017 Source: Thompson Reuters 6
Analysis of Markets & Sectors The Citrus Group Scoring System 7
Euphoria? from our January 19 th Weekly Commentary As we look forward, we place value in the broad strength observed in multiple sectors (market breadth) and participation across all capitalization in stocks (Dow Theory). Our supply and demand analytics do not show the euphoria which can frighten an investor into calling a top to this market. Short-term, intermediate and long-term trends continue to show strength. Risk management in place, we believe this current rally can continue. We will continue to monitor our models and react proactively with a preservation first objective for our clients. 8
Conclusions Equities: Primary & Intermediate Trend BULLISH Favor Small & Mid-Caps over Large Caps Favor US over International, Emerging Markets are opportunistic Favor Growth over Value Leading Sectors: Consumer Discretionary, Financials, Materials & Energy Fixed Income: Primary & Intermediate Trend BULLISH Prices (Lower Rates) Favor Quality as spreads are tight We have been opportunistically adding positions near top of range Continue to favor liquidity Cash Underweight Commodities: Break-Outs Forming Opportunistic 9
Looking Forward Geopolitical Gridlock? Seasonality Quarterly Earnings Taxes 10
Tax Resources This report available to clients has been prepared by PwC and is available to you with their permission by Morgan Stanley Smith Barney LLC ( Morgan Stanley ) for informational purposes only. This material does not provide individually tailored investment advice or offer legal, tax, regulatory or accounting advice. Morgan Stanley does not provide tax or legal advice. Morgan Stanley is not affiliated with PwC. 11
The Citrus Group at Morgan Stanley From L to R: Bob Brett, Herb Means, Maria Mahoney, Anne Marie Williams, Mark Gibson, Dan Murphy, Steve Clapp, Gaury Hernandez & Sam Staab 12
This material is intended only for clients and prospective clients of Portfolio Management program. It has been prepared solely for information purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in any trading strategy. The S&P 500 Index is 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. The S&P Small Cap 600 measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually. The Dow Jones Industrial Average is a price weighted index of 30 blue-chip stocks and serves as a measure of the US Market, covering such diverse industries as financial services, technology retail, entertainment and consumer goods. 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 30 th 2011, the MSCI World Index consists of the following 24 developed country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Technical analysis is the study of past price and volume trends of a security in an attempt to predict the security's future price and volume trends. Its limitations include but are not limited to: the lack of fundamental analysis of a security's financial condition, lack of analysis of macro economic trend forecasts, the bias of the technician's view and the possibility that past participants were not entirely rational in their past purchases or sales of the security being analyzed. Investors using technical analysis should consider these limitations prior to making an investment decision. The individuals mentioned as the Portfolio Management Team are Financial Advisors with Morgan Stanley participating in the Morgan Stanley Portfolio Management Program. The Portfolio Management program is an investment advisory program in which the client s Financial Advisor invests the client s assets on a discretionary basis in a range of securities. The Portfolio Management program is described in the applicable Morgan Stanley ADV Part 2, available at www.morganstanley.com/adv or from your Financial Advisor. Past performance of any security is not a guarantee of future performance. There is no guarantee that this investment strategy will work under all market conditions. 13
201 E. Pine Street 11 th Floor, Orlando, FL 32801 407-849-4774 Main 800-869-0007 Toll Free 407-849-4797 Fax www.morganstanley.com/fa/thecitrusgroup Robert Brett, Financial Advisor Daniel Murphy, Financial Advisor Stephen Clapp, Financial Advisor Herb Means, Financial Advisor Mark Gibson, Financial Advisor Anne Marie Williams, Financial Advisor robert.brett@morganstanley.com daniel.v.murphy@morganstanley.com stephen.clapp@morganstanley.com herb.means@morganstanley.com mark.gibson@morganstanley.com annemarie.williams@morganstanley.com Morgan Stanley Smith Barney LLC, member SIPC. CRC 200487