The Sizemore Group at Morgan Stanley
March 31, 2017
POWER OF THE PURSE
“All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with
amendments as on other Bills.” U.S. Constitution, Article I, section 7, clause 1
As evidenced by the reaction of the markets during late March, sometimes even the President is surprised at the lack of power
over the purse strings of the United States. Presidents propose and Congresses oppose. Traders love a story and react
accordingly either for good or negatively but often without regard to what really matters. We realize that emotions drive markets in
the short run but part of our job is to discern fact from fiction and act accordingly. This fixation on how politics affects the stock
market can have an impact, but as a rule, the strength of the economy is the determinant factor in equity market performance.
Politics can impact consumer confidence which in turn can buffet the economy; however, as Lisa Shalett, our Head of Investment
and Portfolio Solutions at Morgan Stanley Wealth Management, has noted “politics is more the distraction than the driver in the
medium term; legislative sausage-making takes time; focus on economic fundamentals that will drive medium-term earnings
growth (The GIC Weekly, March 27, 2017).”
Our view is the U.S. market is fairly valued with pockets of attractive opportunities particularly in the financial and small stock
sectors. Markets rarely suffer large downturns unless they are severely overvalued, but a 10% correction is “normal” and to be
expected at some time as traders take profits.
Mark Hulbert in the March 26, 2017 issue of Barron’s wrote a column addressing “Are We in a Stock Market Bubble?” The
following is a synopsis of the article: Hubert concludes that recent talk about the stock market being in a bubble appears to be little
more than just that — talk. He bases this assertion on the recently-released study, titled “Bubbles for Fama.” The study was
written by Robin Greenwood, finance and banking professor at Harvard Business School and chair of its Behavioral Finance and
Financial Stability project, and Andrei Shleifer and Yang You, a Harvard University economics professor and Ph.D. candidate,
respectively. This new study defines a bubble as a price increase of at least 100% over a two-year period followed within the
subsequent two years by a drop of at least 40%. The researchers apply their definition to industries, coming up with a sample of
21 bubbles since 1928. The most recent was the coal industry, which peaked in mid-2008 and then suffered a 74% loss. Their
study focused on the probabilities of a crash occurring, and they found statistically significant predictability. Of the 40 occasions
since 1928 in which an industry rose by at least 100% over any two-year period, a collapse of more than 40% over the
subsequent two years occurred 53% of the times — or 21 times, as noted above. In nearly half the cases after big run-ups, prices
continue rising. The researchers found that those big price run-ups most likely to lead to a crash were associated with increases in
volatility, increases in the percentage of firms that issued equity over the trailing year, disproportionate price rises among the
newest firms, acceleration in the rate of the price run-up and above-average price/earnings ratios. The current market is not close
to meeting the first of this study’s two bubble criteria. In an interview, Greenwood pointed out that no industry over the last two
years has gained 100%. The overall stock market’s two-year return is “just” 19.2%, when measured according to the Wilshire
5000 Total Market Index. Why, given all this, is talk about a bubble so widespread? Will Goetzmann, a finance professor at Yale
University, believes it has to do with the moral overtone that investors associate with a bubble. When they claim we’re in a bubble,
he said in an interview, they’re going beyond forecasting an imminent decline and implying that those who lose big in such a
downturn will be getting what they deserve.
As noted in the chart on page three, Europe and the Emerging Markets appear to be the most under-valued areas and we are
increasing our exposure to those regions.
The Sizemore Group at Morgan Stanley
Bing Sizemore, Senior Institutional Consultant, Alternative Investments Director, Wealth Advisor
Skip Sizemore, Senior Investment Management Consultant, Alternative Investments Director, Wealth Advisor
Bennett Dunn, Executive Financial Services Director, Portfolio Manager, CIMA®, Financial Advisor
Shelley Lucas Bennett, CFP®, CIMA®, Financial Advisor
Erica Jevons Sizemore, Business Development Director, Financial Planning Associate
Nichole Griffin, Senior Registered Associate
Jillian Pain, Senior Registered Associate, Financial Planning Associate
Morgan Stanley, 3737 Glenwood Avenue, Suite 320, Raleigh, NC 27612
866.811.062 I www.morganstanleyfa.com/thesizemoregroup
Page 2
Bank lending and overall credit growth are critical to economic growth as it relates to monetary velocity in the economy. Typically,
annual credit growth above 6% has been seen as positive while material deceleration has often augured a slowdown or recession
in the next year or two. A slowdown in commercial and industrial loans and in commercial real estate is currently weighing on
lending. While we believe this may prove a temporary pause driven by uncertainty about tax reform and thus capital spending and
merger-and-acquisition activity, credit growth bears watching.
Source: Morgan Stanley The GIC Weekly March 27, 2017 (Haver Analytics, Federal Reserve Board, National Bureau of
Economic Research as of Feb. 28, 2017)
For comic relief or comfort during these times we often turn to quotes such as the ones below:
•
“If you ever injected truth into politics you have no politics.” Will Rogers
•
“There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally
right.” Ronald Reagan
•
“Democracy is finding proximate solutions to insoluble problems.” Reinhold Niebuhr
•
Stay calm and remember, this too shall pass.
Market Indices and Data (through 3/31/17)
Consulting Group Daily Market Barometer
Index
YTD
Balanced W 60/30/10
+4.1%
S&P 500
+6.1%
DJ Industrial Average
+5.2%
NASDAQ Composite
+10.1%
CBOE Market Volatility (VIX)
-9.1%
Unemployment Rate
4.7% *
Payroll Employment
+235,000*
Productivity
+1.3%**
*As of 2/28/17
**As of 12/31/16
Morgan Stanley Smith Barney LLC Member SIPC.
Index
MSCI World
MSCI EAFE
MSCI Europe
MSCI Emerging Markets
MSCI BRIC
MSCI Japan
YTD
+6.5%
+7.4%
+7.6%
+11.5%
+11.6%
+4.6%
Index
YTD
BC Interm Govt/Credit
+1.0%
10 Yr US Treasury Yld
2.4%
30 Yr US Treasury Yld
3.0%
Consumer Price Index
+0.1%*
Bloomberg Commodity Index -3.2%
Crude Oil Futures (WTI)
$50.60
Gold Futures
$1,247.30
Page 3
For more market data, research and reports, please visit our website:
www.morganstanleyfa.com/thesizemoregroup
Index Definitions
Investments may not be made directly into an index.
Balanced world benchmark is a blend of 60% of the MSCI World Index and 30% of the Barclays US Government/Credit Bond and 10% of the
US Treasury bills index (A short-term debt obligation backed by the U.S. government with a maturity of less than one year.)
Barclays Capital U.S. Aggregate Bond Index - The Barclays Capital U.S. Aggregate Index covers the U.S. Dollar-denominated, investmentgrade, fixed-rate, taxable bond market segment of SEC-registered securities. The index includes bonds from the U.S. Treasury, GovernmentRelated, Corporate, Mortgage-Backed, Asset-Backed, and Commercial Mortgage-Backed Securities sectors. An investment cannot be made
directly in a market index.
Barclays Capital Intermediate Government/Credit Bond Index is a total return index consisting of investment grade corporate debt issues as
well as debt issues of U.S. government agencies & the U.S. Treasury. The debt issues all maintain maturities within a range of one to 9.99 years.
Dow Jones Industrial Average is a price-weighted index of the 30 “blue-chip” stocks & serves as a measure of the U.S. market, covering such
diverse industries as financial services, technology, retail, entertainment & consumer goods. 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.
NASDAQ Composite Index is a market-value-weighted index of all NASDAQ domestic & non-U.S. common stocks on NASDAQ stock market.
Page 4
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of
emerging markets. As of May 30 2011, the MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan,
Thailand, and Turkey.
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.
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 2011, 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.
The MSCI BRIC Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of
the following four emerging market country indices: Brazil, Russia, India and China.
The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance
of the developed markets in Europe. The MSCI Europe Index consists of the following 16 developed market country indices: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, & United Kingdom.
The 10-year Treasury is a debt owed by the United States government for a period of ten years. Each note has a stated interest rate, which is
paid semi-annually. Because the United States is seen as a very low-risk borrower, many investors see 10-year Treasury Note interest rates as
indicative of the wider bond market. Normally, the interest rate decreases with greater demand for the Notes and rises with lower demand. For
example, in December 2008, 10-year interest rates were the lowest in history due to deteriorating economic conditions and the consequent desire
of investors for low-risk investments.
The 30-year Treasury is a debt owed by the United States government for a period of thirty years. Each note has a stated interest rate, which is
paid semi-annually. Because the United States is seen as a very low-risk borrower, many investors see 30-year Treasury Note interest rates as
indicative of the wider bond market.
NYMEX WTI Crude Oil is an index for crude stream produced in Texas & southern Oklahoma which serves as a reference or “marker” for pricing
a number of crude streams & is traded in the domestic spot market at Cushing, Oklahoma. Daily Spot WTI is the price in U.S. dollars per barrel.
NYMEX Gold is an index tracking the spot gold price or common standard for value of an ounce of gold on New York Mercantile Stock Exchange.
Bloomberg Commodity Index: Made up of 22 exchange-traded futures on physical commodities. The index currently represents 20 commodities,
which are weighted to account for economic significance and market liquidity.
Alerian MLP: A composite of the 50 most prominent energy Master Limited Partnerships that provides investors with an unbiased, comprehensive
benchmark for this emerging asset class. The index, which is calculated using a float-adjusted, capitalization-weighted methodology, is
disseminated real-time on a price-return basis and on a total-return basis.
Russell 2000 Index: Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
Wilshire 5000 Total Market Index: This index measures the performance of all US equity securities with readily available price data. Over 5,000
capitalization weighted security returns are included.
MSCI Japan IMI: This index is designed to measure the performance of the large, mid and small cap segments of the Japan market. With 1,134
constituents, the index covers approximately 99% of the free float-adjusted market capitalization in Japan.
VIX: This is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied
volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of
stock market volatility over the next 30-day period
Disclosures*
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. There is no guarantee that this investment strategy will work under all market conditions.
Holdings are subject to change daily, so any securities discussed in this profile may or may not be included in your account if you invest in this
investment strategy.
Do not assume that any holdings mentioned were, or will be, profitable.
The performance, holdings, sector weightings, portfolio traits and other data for an actual account may differ from that in this material due to
various factors including the size of an account, cash flows within an account, and restrictions on an account.
Material in this presentation has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy, completeness or
timeliness.
Third party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and
are not liable for any damages relating to this data. Morgan Stanley Wealth Management has no obligation to notify you when information in this
presentation changes.
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
Page 5
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.
Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment.
Alternative investments are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite
period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of
loss. Funds of funds typically have higher fees than single manager vehicles as they are subject to an additional layer of fees charged by the fund
of funds manager. Alternative investments involve complex tax structures, tax inefficient investing and delays in distributing important tax
information. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing.
International investing may not be suitable for every investor and is subject to risks, including currency fluctuations, political factors, withholding,
lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be
magnified in emerging markets.
Master Limited Partnerships (MLPs) are (rolled-up) limited partnerships or limited liability companies that are taxed as partnerships and whose
interests (limited partnership units or limited liability company units) are traded on securities exchanges like shares of common stock. Currently,
most MLPs operate in the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally
applicable to companies in the energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and
exploration risk. Because of their narrow focus, MLPs maintain exposure to price volatility of commodities and/or underlying assets and tend to be
more volatile than investments that diversify across many sectors and companies. MLPs are also subject to additional risks including: investors
having limited control and rights to vote on matters affecting the MLP, limited access to capital, cash flow risk, lack of liquidity, dilution risk, conflict
of interests, and limited call rights related to acquisitions. Information contained herein has been obtained from sources considered to be reliable,
but we do not guarantee their accuracy or completeness.
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial
circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all
investors. Morgan Stanley Wealth Management recommends that investors independently evaluate particular investments and strategies, and
encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an
investor’s individual circumstances and objectives.
CRC 1751086 4/17