Welcome to Thoughts in the Market.

I'm Mike Wilson, Chief Investment Officer and Chief US Equity Strategist for Morgan Stanley.

All of my colleagues bring you a variety of perspectives.

I'll be talking about the latest trends in the financial marketplace.

It's Monday, March 15th at 11.30 a.m. in New York, so let's get after it.

Long-term interest rates have finally started to catch up to what other assets markets have

been telling us for months, that the recession is behind us and the economy is likely to

be booming later this year.

The rise in rates has had a negative effect on equity valuations, especially the most

expensive stocks that benefited during the pandemic.

As a result, cyclical holes in small caps, two areas we've favored, have outperformed

as growth stocks have lagged.

Year-to-date the value indices have outperformed growth by about 10 percent, and the small cap

Russell 2000s up 19 percent, meanwhile the Nasdaq 100 is flat.

From our perspective, the equity market is doing exactly what it should be at this stage

of the recovery.

The recent non-linear move in long-term interest rates means equity investors can no

longer ignore this risk.

The rates market is mispriced, and now that the seal has been broken, there's a good chance

equity markets start to price in the next 50 basis point move, even if it's months away.

What this really means is that equity valuations are likely to fall this year, a key part of

our call for 2021.

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