Welcome to the thoughts on the market. I'm Mike Wilson, Chief Investment Officer and Chief

U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety

of perspectives, I'll be talking about the latest trends in the financial

marketplace. It's Monday, September 30th at 9 a.m. Eastern, so let's get after it.

As we finish the third quarter, I can't help but think it feels very similar to

last year in many ways. The S&P 500 is

trading right where it was a year ago and near its all-time high while gross stocks

are still the most crowded part of the Equity Manager's portfolio. But there are

important differences too. Sickly stocks have

completely fallen out of bed and trade 20% lower than last September, while

defensive stocks are 20% higher. Meanwhile long-duration US treasuries have been the best investment by far over this period,

with yields 50 percent lower.

To put this in a context over the past 50 years, such a dramatic move in yields over the

prior 12 months has only happened twice

during the great financial crisis of 2008 and the European sovereign debt crisis of 2011 and

12. In short, both stock and bond markets seem to be worried about the future, with most people

talking about the rising risk of recession in the U.S.

This is very different than a year ago.

Given that this defensive leadership in financial markets has been going on for over

a year, a lot of bad news has been priced with the exception of one area, expensive

gross stocks. Since July, gross stocks have underperformed, and we think that will continue into the fall,

given how expensive and crowded they still are.

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