Welcome to 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 13th at 11.30 a.m. in New York, so let's get after it.

As we enter into the last third of the year, markets continue to send mixed signals on

the economy and growth.

For example, while the S&P 500 and NASDAQ are close to all-time highs, the Russell 2000

small-cap index and many individual stocks are well off their highs.

In fact, since May 1st, 90% of all stocks in the Russell 2000 have experienced a 10% drawdown,

while 55% have fallen by more than 20%.

For active equity fund managers, catching the rotations under the surface this year has

been more important than simply calling the index.

As we have suggested, this is what typically happens during the mid-cycle transition in

any economic recovery from a recession.

We were very bullish on the cyclicals in small caps as we entered the year, expecting

interest rates to move sharply higher as growth accelerated towards its peak rate

of change in the recovery.

However, in March, we pivoted towards quality and downgraded early cycle sectors in small

caps.

This worked out very well, but now we find ourselves wondering if the growth deceleration

...