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The Caruso-Colonna Group at Morgan Stanley
Sandra B. Caruso, CERTIFED FINANCIAL PLANNER™
Senior Portfolio Manager
Financial Planning Specialist
Financial Advisor
Keith A. Colonna, CERTIFED FINANCIAL PLANNER™
Vice President
Senior Portfolio Manager
Financial Planning Specialist
Financial Advisor
Our Mission – To Help Our Clients Gain and Maintain Financial Freedom
May, 2014
“I love the man that can smile in trouble, that can gather strength from distress, and grow brave by reflection. 'Tis
the business of little minds to shrink, but he whose heart is firm, and whose conscience approves his conduct, will
pursue his principles unto death.” Thomas Paine
2014 YTD Markets, Commodity, & Currency
Update
April ‘14 Mar ‘14
Dow Jones Industrials (TR) 0.7%
-0.2%
S&P 500 (TR)
2.6%
1.8%
NASDAQ (PR)
-1.5%
0.5%
MSCI EAFE (TR)
1.1%
0.0%
MSCI Emerging Markets
-0.7%
-0.8%
Crude Oil Futures
$99.15
$101.37
Natural Gas Spot
$4.72
$4.36
Gold:
$1,310
$1,284
Dollar ($) per Euro (€)
$1.39
$1.38
Dollar ($) per Yen (¥)
$0.0098 $0.0097
10-yr Treasury yield:
2.65%
2.74%
Sources: Morgan Stanley Month End Asset
Return Analysis 04/2014 and The Wall Street
Journal 5/5/14. (Commodity and currency data
for informational purposes only).
Market Update: With April now behind us, we can look back at last month’s market
data and understand that not much happened over the past four weeks. The Dow
Industrials advanced slightly into positive territory and the S&P 500 advanced as well.
The technology-heavy NASDAQ composite declined about 2% last month while
foreign markets were little changed. Even the commodity and currency data tabled
nearby were little-changed over the past four weeks.
Economic data from last month was somewhat conflicting and it is hard to say how
much of an impact is lingering from the harsh winter. March existing home sales
were nearly 8% lower than they were one year ago while the median existing home
price was nearly 8% higher than one year ago. (1) The Commerce Department also
reported on 4/30/14 that 2014 first quarter GDP growth was quite weak clocking in
at only +0.1%, essentially zero growth.
Conversely, the Institute for Supply Management (ISM) indices for both the
manufacturing and non-manufacturing sectors both increased strongly last month.
On the manufacturing side, the ISM index reported gains in employment, supplier
deliveries, and exports & imports. On the non-manufacturing side, growth was even stronger as business activity & production
jumped nearly 8% and new orders nearly 5% although inventories grew and order backlogs declined modestly. (2) All in all, we
think this data indicates solid growth across the business sector which pleases us very much given that the business sector
underpins the entire economy.
Within the overall economy, airlines have been a leading group again this year as some in the investment community believe that
they are finally figuring out how to be sustainably profitable. Airlines are notoriously volatile though and given the long history of
bankruptcies within the industry, we remain circumspect about them. Right behind them though are gas and electric utilities with
electric utilities being perhaps the bigger surprise given that they tend to be sensitive to rising interest rates. Natural gas utilities
though have not surprised us given that cold weather and high gas consumption have pushed spot gas prices to nearly $5.00. (3)
The pharmaceutical sector has also experienced a very strong year driven in part by a high level of merger & acquisition activity.
Over the past four weeks, several very large deals have been announced and in at least a couple of them the targeted company is
rejecting the offers ostensibly to seek a better price or remain independent. This has fueled optimism in the pharmaceutical
sector especially among the larger companies that we tend to follow more closely. Even today (5/6/2014) as we finished this
issue, another major deal proposal was announced this morning. Animal spirits seem to still be alive and well. (3)
Lagging on the year are consumer cyclical companies particularly the specialty, luxury and apparel retailers. Shares of financial
companies also have largely been flat on the year on the heels of a fairly solid 2013. Interest rates remain low which, for banks,
pressures net interest margins and hence profitability. (3)
The year is still unfolding with only four months behind us, three of them encompassing one of the worst winter seasons of the
past century. Despite the flat first quarter GDP though, the ISM data suggests underlying strength in the economy that might not
be fully evident in metrics like home sales. We think things in general are better than many believe.
Lose The Fear and Gather Strength: Four weeks ago we remarked that this coming June we will be five years past the official end
of the recession in June 2009 (4). Investors though still seem to be more driven by fear than common sense. The next disaster is
about to befall us – it is what we hear on TV, talk radio and the internet, right? The collapse of stock markets is eminent.
Fear can be a useful thing. It underpins the “fight or flight” survival instinct of virtually all animals. However, humans possess a
higher intelligence that includes the ability to reason. Reason puts logic before fear and we can use reason to reexamine many
past predictions that failed to materialize. The Mayan calendar allegedly predicted the end of the world in 2012; we are still here.
Doomsday scenarios were predicted for Y2K; we do not recall any Y2K disasters. The Canadian Globe and Mail newspaper
recently reported that youth anxiety about climate change is on the rise because kids hear about it nonstop. (5). Of course – the
economy is rigged, markets are fixed and investing is a gamble. We hear this last one from cynics a lot.
We think society needs to lose its fears and allow somebody else’s
“little mind” to shrink. Fear will not solve the problem of funding
retirement income, higher education nor will it protect against
risks that can cause financial ruin. Fears about investing, especially
equity investing over the long term, are also misplaced in our
view. Common stocks are fractional ownership of a businesses
and, perhaps best of all, without the burdens of management.
Real GDP, Billions of Chained 2009 Dollars - 1/1/1947 - 1/14/2014
data source: Federal Reserve Bank of St. Louis
$18,000.00
$16,000.00
$14,000.00
$12,000.00
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$-
1/1/2012
7/1/2005
10/1/2008
4/1/2002
1/1/1999
7/1/1992
10/1/1995
4/1/1989
1/1/1986
7/1/1979
10/1/1982
4/1/1976
1/1/1973
7/1/1966
10/1/1969
4/1/1963
1/1/1960
7/1/1953
10/1/1956
4/1/1950
1/1/1947
It is not a gamble in our view to purchase an ownership stake in a
large company whose shares trade publicly on an exchange. We
see little value in fleeing from them either at the first whiff of
economic weakness. In the last recession & crisis, we do not recall
seeing “FOR SALE” signs in the windows of every dry cleaner, restaurant, auto dealer or jewelry store in town. Small and midsized business owners do not just hold a fear-driven fire sale when a recession develops and we do not think individual investors
should behave any differently than these business owners.
We mentioned the weak first quarter GDP. Many in the economic media made this sound like an economic disaster. The graph
nearby though shows quarterly real GDP dating back to January 1947. We have endured plenty of recessions, wars and assorted
crises since that time. The bad economic years of the mid 1970’s – early 1980’s are now small bumps on the curve. Even 2008 2009 does not look so ominous on this long curve of US economic progress. Lose the fear. Gather strength.
(1) Existing Home Sales Remain Soft in March, National Association of Realtors 4/22/14; (2) Institute for Supply Management Reports on Business® May 2014; (3) Morgan
Stanley Month End Asset Return Analysis 04/2014 (4) National Bureau of Economic Research; (5) Youth Anxiety On The Rise Amid Changing Climate, Macdonald, The
Globe and Mail, 5-1-14;
The views expressed herein are those of the authors and do not necessarily reflect the views of Morgan Stanley Smith Barney 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.
Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness.
The Dow Jones Industrial Average is a price-weighted index of the 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 S&P 500 is an unmanaged, market value-weighted index of 500 stocks
generally representative of the broad stock market. The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on NASDAQ.
The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity
performance, excluding the US & Canada. 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. An investment cannot be made directly in a market index.An investment cannot be made directly in a market index.
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 Smith Barney LLC
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 strategy will depend on an investor’s individual circumstances and objectives.
Morgan Stanley Smith Barney LLC. Member SIPC.
The Caruso-Colonna Group at Morgan Stanley
1603 Carmody Court, Suite 301
Sewickley, PA 15143-8552
http://www.morganstanleyfa.com/carusocolonnagroup
phone: 800-966-8274
fax: 724-933-1470
[email protected]
[email protected]