Welcome to Thoughts on the Market.

I'm Andrew Sheets, Chief Cross Asset Strategy for Morgan Stanley.

Along with my colleagues, bringing you a variety of perspectives,

I'll be discussing trends across the global investment landscape and how we put those

different ideas together. It's Friday, February 21st at 2 p.m. in London.

We think a lot about cycles at Morgan Stanley and not the type that you ride. Many parts of the

economic world exhibit cyclical characteristics, rising and falling like a wave with

the passage of time. Commodity markets, housing prices, mergers and acquisitions, the job market, all have tended to move in long waves, as far back as we have available data.

Our interest, of course, is that those long waves can play a major role in investment success.

For today's discussion, I want to talk about how we've been modeling the U.S. business cycle and ways

our investment indicators have appeared wrong and the peculiar way they've been right. Our indicators look at a range of

economic and market data to estimate this cycle. If one imagines a two-by-two grid,

that data can be in one of four possible boxes based on whether it's better or worse than normal and

improving or deteriorating.

Those four possible states are the four possible outputs of our indicator.

From early 2014 to early 2019,

U.S. conditions were better than average,

and they were improving.

We term that box expansion, and historically,

it's meant above average returns,

with stocks doing almost 4% better than average when these conditions are in place.

And given that average stock returns are already pretty high, this backdrop historically is pretty good.

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