Welcome to Thoughts in the Market.

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

A lot of my colleagues bring you a variety of perspectives.

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

It's Monday, August 30th at 11.30 a.m. in New York, so let's get after it.

A big component of successful investing is getting the narrative right.

Early identification of the correct narrative can lead to great performance, while ignoring

the narrative or getting it wrong usually produces the opposite outcome.

2021 may be a perfect example of this playing out in real time.

With the S&P 500 up another 20% so far this year, many active managers are finding it hard

to keep up, as the market leadership is bounced around more than normal.

With that said, the price action in US equity markets this year has followed the script

of changing narratives quite nicely.

Cyclocoles and small caps led the charge earlier in the year as the market contemplated

the distribution of vaccines and the reopening of the economy.

This was in line with our early cycle stage recovery narrative.

In mid-March though, we pivoted to a new narrative, labeling it the mid-cycle transition,

the period when markets contemplate the peak rate of change in growth and policy.

At that time, we downgraded small caps and recommended investors upgrade portfolios

by buying quality.

Since then, the MSCI quality index has outperformed small caps by 22%, a 60% annualized rate.

However, last week, small caps and lower quality stocks rep doubled digits.

...