Document 6564385

October 17, 2014
Dear Client,
U.S stocks rallied today, providing much needed relief for markets, following accelerated selling throughout the week. After posting six
consecutive trading days of declines, the Dow Jones Industrial Average soared 263 points, or 1.6%. Today’s positive finish comes at
the end of what has been a very volatile week for the markets, as exemplified by four 150 point letters in the last week. The main
catalyst for today’s move came from abroad, as the European Central Bank seemed more likely to increase stimulus measures.
Indeed, an executive board member at the ECB commented that they will begin purchasing assets “within the next days” as part of their
new easing program and a Bank of England official indicated that rates could stay lower for longer. This commentary helped quell
markets which have sold off recently in the wake of slowing Eurozone growth and questions about future ECB policy action.
Economic news out of the US also added a boost to the rally today, illustrating that the US recovery continues to be resilient despite
European growth woes. The University of Michigan consumer confidence index rose in October to the highest reading in about seven
years, beating consensus forecasts. This report is consistent with the MS & Co. economics team’s view of improving consumer
fundamentals driven primarily by gains in aggregate wages and salaries, and further boosted by lower gas prices. Additionally, housing
starts surprisingly rebounded 6.3% in September ahead of economists’ forecast for a 4.6% rise. Lastly, third quarter earnings were off
to a good start this week, with the majority of companies that have reported showing better than estimated results. Today’s risk on
environment was a reversal of the week’s trends when investors mostly sought safe haven assets. The yield on the 10-year U.S
Treasury Note climbed to 2.2% today, though still down for the week.
For the day, all 10 S&P 500 sectors finished in the green with Industrials leading, up 2% followed by Healthcare up 1.6% and Materials
up 1.4%. Utilities gained the least, up 0.6% followed by Energy up 0.9% and Telecom up 1.1%. For the day all three major indexes
gained, with the S&P 500 up 24 points, or 1.3% to close at 1,887, and the NASDAQ up 41 points or 1.0% to 4,258.
Looking ahead, please find below a summary of MS & Co.’s current views for the major asset classes:
MS & Co. chief U.S equity strategist, Adam Parker, maintains a 12-month forward price target of 2,125 for the S&P 500. This
represents roughly 13% potential upside from today’s close. Notably, Adam analyzed previous periods in history when the market P/E
multiple expanded by three multiple points like it has over the last two years from 12x to over 15x forward estimated earnings today and
found that despite an elevated valuation, the market continued to perform well for the subsequent 12-24 months in the three periods in
history in which this scenario occurred (i.e., March 1986 to September 1987, December 1991 to December 1992, and November 1996
to October 2000). Adam has remained positive on the market since March 2013, but recently moved to a more balanced view. Within
his sector recommendations, Adam favors Healthcare and Technology, and is underweight Consumer Staples and Financials. Stockspecific risk has been on the rise in recent months and Adam believes investors should favor a somewhat more concentrated portfolio
approach focusing on stocks with high free cash flow generation, dividend growth, and high earnings achievability.
From an asset allocation perspective, Morgan Stanley Wealth Management CIO, Mike Wilson, and the Global Investment Committee
(GIC) continue to favor equities over fixed income in the medium to long term and see gradual improvement in the global economy. For
example, the GIC tactical model 4 for moderate risk investors is allocated to 50% equity/26% fixed income. Supporting this view, the
GIC notes that equity performance is broadening around the world, with falling correlations among asset classes reflecting the ongoing
growth recovery. The GIC continues to see upside potential in equities in 2014 even as interest rates likely rise gradually, and believes
that selectivity is paramount. Globally, the GIC has remained bullish on Japanese equities since early 2013 and remains positive given
an attractive earnings growth profile, ongoing monetary and fiscal stimulus initiatives from Prime Minister Abe, and likely export-related
gains from yen depreciation. Notably, “Abenomics” seems to be making progress breaking Japan’s 15-year deflationary turmoil as
inflation expectations have risen significantly over the past year. Mike Wilson believes rising inflation in Japan is critical as it impacts
consumer, corporate and investor behavior. While Japanese equities had 30%+ gains last year, the GIC highlights that most of this
move has been driven by foreign investors, which may leave domestic investors as a potential driver of incremental upside.
While emerging market stocks have rallied in recent months, the GIC remains underweight EM because likely higher US interest rates
and a strengthening US dollar could leave emerging market stocks vulnerable. EM economies are rebalancing to domestically driven
demand from export and infrastructure, which will take time, and these economies also remain sensitive to global liquidity withdrawal as
Fed tapering continues. Although EM equities may appear cheap relative to DM equities on a price/earnings basis, the GIC highlights
that the market-cap weighted MSCI EM Index has large weights in cyclical sectors, which likely do not warrant higher valuations.
Despite the recent sell-off in energy the GIC continues to view select MLPs as attractive, particularly relative to other yield-producing
assets and within the context of a 10-year U.S Treasury rate around 2.2%.
From a fixed income perspective, the GIC still recommends below-benchmark duration, which is consistent with the views of Morgan
Stanley Wealth Management fixed income strategists.
Market data provided by Bloomberg.
Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock
Exchange. An investment cannot be made directly in a market average.
MSCI Emerging Markets Index measures the performance of equities issued by companies domiciled in emerging markets.
NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on NASDAQ. 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. An
investment cannot be made directly in a market index.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has
been prepared for informational 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. Past performance is not necessarily a guide to future performance.
The material has been prepared for informational purposes only and is not an offer or recommendation to buy, hold or sell or a solicitation of an offer to buy or
sell any security, sector or other financial instrument, or to participate in any trading strategy. It has been prepared without regard to the individual financial
circumstances and objectives of individual investors. The appropriateness of a particular investment or strategy will depend on an investor's individual
circumstances and objectives.
This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may
change. We and our third-party data providers make no representation or warranty with respect to the accuracy or completeness of this material. Past
performance is no guarantee of future results.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended
to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under
either the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or under section 4975 of the Internal Revenue Code of 1986 as amended
("Code") in providing this material.
Morgan Stanley Wealth Management and its affiliates do not render advice on tax and tax accounting matters to clients. This material was not
intended or written to be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties
that may be imposed on the taxpayer under U.S. federal tax laws. Each client should consult his/her personal tax and/or legal advisor to learn about
any potential tax or other implications that may result from acting on a particular recommendation.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes
in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist
events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather,
and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors,
including lack of liquidity, participation of speculators and government intervention.
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.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. Investing in foreign markets especially emerging
markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in
currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can
be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. These risks include political and economic
uncertainties of foreign countries as well as the risk of currency fluctuations.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. Rebalancing does not protect against a loss in
declining financial markets. There may be a potential tax implication with a rebalancing strategy. Investors should consult with their tax advisor before
implementing such a strategy.
Master Limited Partnerships (MLPs) are 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.
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance
of any specific investment.
This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.
Morgan Stanley Wealth Management research, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley
Smith Barney LLC.
© 2014 Morgan Stanley Smith Barney LLC. Member SIPC.