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July 11, 2017

MorganStanley

The Wood Group at Morgan Stanley W. Keith Wood, CFP® Senior Vice President – Wealth Management Family Wealth Director Senior Investment Management Consultant Senior Portfolio Manager Financial Advisor NMLS# 1279466

� Fundamentals are Key � The Wind in Our Sails � A Boiling Pot – A Valuations Issue

� Earnings � What’s in the Wind? – Inherited

IRA’s Changes? � Summary

� Our Commitment � Value Proposition

“Success is neither magical nor mysterious. Success is the natural consequence of consistently applying the basic fundamentals.”

Jim Rohn, 1930-2009 American-Businessman Fundamentals are the Key I have been told that jet pilots have to depend on their instrument panels more so than what one might think. The feel of the plane or what can be seen out the cockpit window is im-portant but limiting. Night flight, heavy clouds, or other distrac-tions can impair a pilot’s orientation. In essence the fundamentals of flight and the state of the aircraft are essential for safe flight and the pilot’s best source of that information is the instrument panel. The importance of fundamentals also applies to the investor. Investors too, can often become disoriented especially in uncertain or turbulent times. Therefore, a need to better understand the fun-damentals driving the economy and its markets, as well as reasonable factors that may change these fundamentals, should be key elements in making investment decisions. The fundamental factors that drive our domestic and global economies are numerous and are reported to us through various measurements such as housing starts, unemployment figures, wages, savings, inflation, and interest rates as well as consumer confidence measures and the GDP, just to mention a few. Market fundamentals are also numerous, and are reported at the index level, as well as the sector and individual stock level in measurements such as P/E ratios, equity returns, corporate fi-nancial reports, earnings, profits, debt levels, and many other measurements. Heightened economic expectations such as we have experienced since the presidential election have lead many financial columnists and economists to use terms such as “hard data” and “soft data” to differentiate certain economic measurements. They have used these terms in an effort to better ex-plain the data’s relative effect on the economy and the markets. Hard data refers to concrete economic

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data in the economy, such as unemployment levels or average wage figures, while soft data refers to sentiment figures or data that measures a perceived attitude or direction of the economy. Of the two data points, hard data rules the day but soft data can suggest possible changes. The problem with soft data is it can change quickly and may actually have little to no effect on the future of hard data. The importance of soft data cannot be dismissed but it can be misleading. As an example, “what if’s…” (soft data surrogates), such as a heightened state of political rhetoric and/or policy specula-tion both here and abroad, may seem very important but may have little to do with current fundamen-tals and could instead only serve to distract or mislead investors. On the other hand active policies such as the recently issued executive order to limit additional federal regulations, may affect certain fundamentals, as well as investor sentiment – both the hard and soft data. The Wind in Our Sails

While the equity markets’ advancement of 2016 paused last summer and fall in anticipation of the election, the markets rallied afterwards. This was partly a result of the certainty the election provid-ed investors but primarily it was from strengthening economic fundamentals that were building through the summer and early fall that investors had yet to act on. While these fundamentals have continued strengthening they have done so at a slow but steady pace, improving both the economy and our US equity markets. Think of it this way and assume for a moment we are on a sailboat. While the prevailing winds of our economy continue to move us forward at a slow pace, a change in command increased expectations that we could be steered into waters providing greater winds to fill our sails and increase our speed via tax reform, repatriation, and more spending on infrastructure. However, recent headwinds in Congress about how the boat should be steered have dampened these expectations, at least for the near-term. Nev-ertheless, the prevailing winds of our current economy continue to steadily improve, mainly because its path and its rate of growth indicate little change. The promise of less governmental regulation, via an executive order and a pro-business attitude coming from the White House, may have helped lift the spirits of many corporate leaders and business-es. Activity has picked-up as measured by the PMI1 (hard data) and investor’s sentiment has increased according to the latest AAII Sentiment Survey2 (soft data). In essence the prevailing winds have not yet changed but the weight of the boat and the shackles of regulatory restraint may have been lightened as we begin the process of jettisoning burdensome regulatory baggage. As a result, we may make better time. A Watched Pot – and Remember Jack? An ongoing debate regarding the equity markets ability to climb has heightened. The reasons are several and chief among them has been the slow pace of economic growth. This could be concern-ing in that some investors may become frustrated or disenchanted with the current speed of promised changes by the administration and Congress. As a result others may believe the market has gotten ahead of itself, especially if too much credence has been given to expectations.

In addition, some economists and investors are beginning to conclude our long economic ex-pansion period could be coming to an end. Their reasons are partly based on our history regarding economic expansion periods. As it turns out we are in our 97th month of economic expansion that started in June of 2009. The average economic expansion period in the U.S. going back to 1900 has

1 PMI - Purchasing Managers' Index is an indicator of the manufacturing sectors economic health. It is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. 2 AAII Sentiment Survey – The American Association of Individual Investors Sentiment Survey measures the percentage of indi-vidual investors who are bullish, bearish, and neutral on the stock market short term; individuals are polled from the AAII Web site on a weekly basis.

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been 47 months. The longest period of economic expansion started in March of 1991 and ended in March of 2001 lasting 120 months.3 So while we may continue our expansion for the next couple of years, history tells us we are nearing a time when some contraction in our economy is likely and economists and investors are looking at all the “what if’s” in the hope of divin-ing a contraction just before it happens. In an environment such as this the phrase “a watched pot never boils” takes on a whole new meaning. Or like the “Jack in the Box” we played with as kids, we knew that Jack would pop out when we turned that crank, but nevertheless it always managed to surprise us. Earnings – Always a Key Fundamental for Equities

Earnings for the 1st quarter of 2017 were encouraging as they increased 14.7% over the first quarter of 2016. Second quarter earnings which started reporting this past week are expected to in-crease year over year by 6.8% and by 1.97% over the 1st quarter of this year4. In addition, Morgan Stan-ley’s earnings projections are expected to increase from the 2nd quarter to the 3rd quarter at a rate of 7.77%, and from the 3rd quarter to the 4th quarter at a rate of 4.76% for 2017. The consensus earnings estimate for the S&P 500 in 2017 is now at $140.18 reflecting a forward 12-month P/E ratio of 17.3, according to FactSet5. Assuming a blended consensus earnings estimate for 2017/2018 of $142, Morgan Stanley has provided a 2017 price target for the S&P 500 which has been broken down into two probable cases: the Bull and the Base case. In addition they provided a third probable case, the Bear case, using an earnings estimate of $126.50 for the S&P 500. They also have assumed the following P/E ratios (price/earnings) of 21.1, 19.0, and 16.6, for each case, respectively. As a result, their projected target for the S&P 500 at the end of 2017 is rounded to 3,000 for the Bull case, 2,700 for the Base case, and 2,100 for the Bear case. The S&P 500 closed at 2,425.18 on July 7th, 2017, suggesting the following range of returns for the remainder of the year at 23.7%, 11.33%, and -13.4% for each case, respectively.6 Of the eleven sectors in the S&P 500 Index five sectors are expected to provide between 10% and 14% earnings improvement over 2016. They are the Healthcare at 14.06%, the Financials at 12.7%, the Information Technology at 12.28%, Materials at 10.3% and REIT’s at 10.4%. A stand out among all eleven sectors is the Energy sector, which is expected to have improved earnings of 252% over 2016 earnings. However, the recent reduction in crude oil prices resulting from high inventory levels may dampen an upward trend in energy stocks for the near-term which may provide a current opportunity for longer-term investors. What’s in the Wind? – Inherited IRA’s Changes?

We should all know by now that when Congress is in session anything can happen and many of the plans we employ to help protect our future can quickly change with the stroke of a pen. So it may be said with regard to the future of Inherited IRA’s, commonly referred to as the “Stretch” IRA. According to James Lange, president of Lange Financial Group, LLC in Pittsburgh, “we’re now one step closer to seeing the final nails pounded into the coffin of this valuable estate-planning tool. In September of 2016, the Senate Finance Committee voted 26-0 to eliminate the stretch IRA”.7 At the time the “historic bipartisan recommendation was part of the proposed Retirement Enhancement and Savings Act of 2016 (RESA)”. In the event Congress enacts this proposal how we deal with these IRA’s will need careful consideration as to avoid paying unwanted taxes within five years of an owner’s death. According to the proposed act, all qualified retirement plans such as 401k’s, 403(b)’s, SEP’s, 457 Plans and all Roth plans would also be included.

3 Source: National Bureau of Economic Research (NBER). The data can be found at www.nber.org/cycles/ and reflect information June 2017. 4 Morgan Stanley| Research – Quantitative Equity Research, S&P 500 Earnings Review: Chanting for an Encore, dated July 6, 2017. 5 FactSet: Earnings Insight, dated July 7, 2017 6 The GIC Weekly: Morgan Stanley, dated July 10, 2017 7 Trusts & Estates – “The Latest Developments in the Death of the Stretch IRA” by James Lange - June 2017 issue

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As a reminder, under current law the beneficiary is required to make minimum distributions from the Inherited IRA annually. This is based on the beneficiary’s life expectancy or that of the dece-dents’ if they were 70 ½ or older when they died. The proposed law would eliminate this feature and requires taxes to be paid on the retirement account or plan within five years of the owner’s death.

Obviously, the need for additional revenue to help pay for proposed tax cuts is the legislators reasoning behind this proposal. There are however, some proposed exceptions to the 5-year rule, such as a surviving spouse, charities, charitable remainder trusts, minors, disabled and chronically ill individ-uals and beneficiaries born within 10 years of the deceased IRA owner. Regarding existing Inherited IRA’s, beneficiaries who are currently stretching the IRA via re-quired minimum distributions would be subject to the 5-year rule immediately and that time period will continue to be based on when the owner died. For many current beneficiaries of these plans the tax bite could be significant and a last minute surprise. However, according to Mr. Lange the proposal also contains an exclusion on the first $450,000 (indexed for inflation) of inherited retirement assets from the 5-year rule per deceased IRA owner. “The $450,000 is the maximum exclusion amount regardless of the number of beneficiaries.” 8 This would clearly be a reprieve for smaller Inherited IRA owners. This proposal is not the current law but Congress seems to be favoring it. Our point on this issue should be clear. We need to be vigilant regarding any legislative changes. The best estate plans could easily fail or be crippled with the stroke of a pen and it will ultimately be the individual’s respon-sibility to make appropriate plan changes if needed. We will work to keep you posted. Summary – Bullet Points

An investor’s perspective of the world around him is processed though what he reads, to whom he listens, and what his past experiences have been. I dare say that few investors come to the market place without some bias. Probably the hardest thing for an investor to do is to approach the market with an open yet thoughtful mind. Such an approach is much different than one that just absorbs the data and reacts to the emotion it may evoke. A thoughtful mind works to understand the consequences of the data from both a positive and negative perspective before reacting. For the serious investor a thoughtful mind requires a studious approach that is laced with both experience and a healthy under-standing of human behavior. Of all the issues facing the marketplace, it’s earnings that will always con-tinue to be a point of focus. We expect market volatility will increase this year and with it the oppor-tunity to remain invested will be important.

For over eight years our economy has been long on monetary policy and short on fiscal policy. With legislators beginning to focus on pro-growth fiscal policies, expectations for our economy’s future have been high. But as expected the process is messy, noisy and not without difficulty. Provided the President and Congress carry through on changes affecting our tax code, burdensome regulations, and our needy infrastructure, we could see a continuation of our current business cycle.

Corrections, when they occur, could provide greater opportunities for those investors who can and do take a proactive approach when making investments. In light of our commentary and belief that we may be approaching the latter innings of our current economic expansion, we continue to be-lieve we are in the first few years of a secular bull market. As a result, we would encourage a positive proactive investment approach that focuses on the changes that develop. Remember, “You can’t catch fish unless your line is baited and in the water”

It is our continued belief that investors have to be selective in the companies and investments they own and that the benefit of buying the broad market via index funds is giving way to active money managers whose focus is to buy specific holdings within their investment discipline. Basically it contin-ues to be a stock picker’s market. In reality, being selective takes more work on the part of investors and many either don’t have the time or the inclination to invest in that decision process.

8 Trusts & Estates – “The Latest Developments in the Death of the Stretch IRA” by James Lange - June 2017 issue

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– Bullet Points

1. The US equity market – has continued to advance as anticipated but as uncertainty has increased over future fiscal policy changes, or the lack thereof, the market may trade in narrow trading bands and be subjected to occasional pullbacks when volatility increases. However, improving fundamentals, accelerating growth, and stronger technical data suggest the market has more room to go.

2. The Fed – has raised rates four times in the past two years with the most recent increase occur-ring in June of this year. They have also made clear in recent comments their desire to start re-ducing their balance sheet starting this fall. It is currently valued at over 4 trillion dollars. De-spite these changes and considerations in policy, inflationary pressures have remained low and below the Fed’s target of 2.1%. We continue to believe the Fed may have the room it needs to continue raising rates gradually and to begin the long process of reducing its balance sheet over the next several years without much of a negative effect on our economy. It will be like thread-ing a needle.

3. Real GDP growth rate – for 2016 was 1.6% and according to Morgan Stanley research we are ex-pecting a growth rate of 2.2% for 2017.

4. Our focus on Europe and Japan continues. We look for companies with historically high returns on equity, steady year over year earnings growth, low financial leverage, strong cash flow, and sound management. European stock valuations are relatively low and compelling in relation-ship to their actual earnings. In addition, the ECB’s (European Central Bank) recent hawkish comments regarding the EU’s monetary policy may actually serve as an opportunity to gain ad-ditional footing in selected stocks. We continue to expect further economic growth in Europe over the next several years. As it stands, they are believed to be about three years behind the U.S. in their recovery.

5. Emerging Markets – are doing well this year. We have continued to increase our allocation in these markets over the past few months with the understanding that increased volatility in the U.S. dollar may impact their performance in the near-term. Additionally, the U.S. dollar Index is down 6.9% YTD and has been a contributor to the Emerging Markets performance.

6. U.S. Sectors of special interest are Energy, Healthcare, Financials, Technology, Materials, and In-dustrials.

7. The Fixed Income Market – The current 10-year Treasury rate is at 2.38%. Policy shifts via the Federal Reserve along with the recent ECB’s hawkish comments have many investors expecting these yields to increase in the second half of the year. We have begun to see the yield curve steepen as the 30-year Treasury has moved from 2.7% on the 26th of June to a current rate of 2.9% as of July 10th.9 We continue to favor municipal portfolios with short duration periods, thus lower price volatility and lower risks (between 2 and 5 years).

8. Fundamentals Are Key – As we have stated before a disruptor of sorts occupies the presidency and we remain hopeful this will prove to be beneficial for all over time. While a lot of attention will likely continue to be on various comments and tweets coming from the White House, we need to remember the importance of staying focused on the fundamentals. It may be easy to get caught off guard in what might continue to be a highly charged political environment. From our perspective, pullbacks based on political rhetoric without a change in real fundamen-tal issues could provide near-term opportunities. However, making investment decisions based solely on political rhetoric is typically a bad idea. Restraint and vigilance may continue to be an investor’s best option in such an event.

9 Thomson One

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Our Commitment For specific recommendations and strategies we suggest getting together to review your needs.

As a Family Wealth Director with Morgan Stanley, my team and I work closely with Families to help them understand and manage both financial and non-financial wealth issues.

Our commitment to FAMILY has driven our desire for knowledge and our designations have put us in the top 1.5% of advisors within Morgan Stanley. Our team’s cultural DNA is the FAMILY.

Our entire practice is built on a deep belief that your family’s tomorrows should focus on what you value the most. We welcome the opportunity to learn about what is important to you. W. Keith Wood CERTIFIED FINANCIAL PLANNER

TM

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Value Proposition

The Wood Group at Morgan Stanley guides hard working individuals, families, trustees and fiduciaries through the

maze of financial issues in order to grow and preserve their assets responsibly. We are committed to making a meaning-

ful difference in their lives by helping them to make well-informed financial decisions and by providing the highest level

of client service. Equally important is our attentiveness to anticipating changes and challenges in our clients’ lives by

being prepared to meet those circumstances as they arise. We endeavor to earn our clients’ trust, thereby building long-

lasting relationships.

We provide individuals, families, trustees and fiduciaries the consultative and objective advice necessary to help

them select from the wide array of investment choices and strategies involved in their financial lives.

Individuals and families often lack the time, interest, professional skill or emotional constitution to successfully

manage their assets by themselves. Many struggle to understand how their assets and portfolio income fit within their

overall financial picture.

An individual or family must balance the competing factors of income, spending, future obligations, recreation,

retirement and charitable ambitions. And they must have a comprehensive investment plan crafted to match their goals.

Surprising to some, these challenges can grow as wealth increases.

Our multi-disciplinary team helps clients achieve their financial goals by:

• Thoroughly exploring their financial resources, needs and desires to ensure that financial planning, portfolio

management, tax and estate planning are integrated;

• Preparing a comprehensive plan that addresses balance sheet issues, spending and saving, cash flow, invest-

ment policy, portfolio allocation, stock options and restricted stock, taxes, insurance, estate planning and more;

• Recommending a broad mix of asset classes and money managers to reduce volatility and seek the best returns

consistent with the client's tolerance for risk;

• Annually updating the financial plan and staying in contact throughout the year to address concerns and events

of financial importance.

Comprehensive planning provides an integrated strategy that encompasses your financial needs with a focus on

both short and long-term goals.

We recommend that you review your financial plans with us if you have not already done so in the past year.

In addition, you may know a friend or colleague who could benefit from our services and we consider it a compliment

when we are introduced to them. The process of re-evaluating your plans regularly in light of your needs and goals is

important. Is it possible your needs have changed and your plans have not? Markets are not the only sources of change.

In many instances the greatest change comes from home. Nevertheless, considering the current market environment and

its opportunities may be reason enough to encourage you to meet with us to review your plans.

The process does not stop here. When investments are made it continues to be fundamentally important to

manage the risks inherent to each. Whether the investment is a certificate of deposit, a corporate or government bond,

stocks, annuities, or the futures markets, an element of risk is involved. Understanding the risk and its potential return

in light of current market conditions and its relationship to your portfolio and investment objectives are important.

It is our job to work with you in the planning process and then in implementing those plans to help you realize

your investment goals.

The Wood Group at Morgan Stanley

Come see us.

Check out our client brochures and upcoming seminars on our web page at

www.fa.morganstanleyfa.com/thewoodgroupms

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