Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, discusses long-term investors’ biggest concern – the amount and timing of interest rate moves.Lisa Shalett is a member of Morgan Stanley’s Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.----- Transcription -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: And on this special episode of the podcast, we'll be discussing some of the latest market trends and what they may mean for our retail clients. It's Tuesday, January 23rd at 4 p.m. in London. Lisa Shalett: And it's 11 a.m. here in New York. Andrew Sheets: Lisa, it's great to have you back on. So wealth management clients are typically investing for the long term in order to meet specific goals such as retirement. And with that in mind, let's start with the current market backdrop. You know, we've entered the year with increased market confidence. We've seen implied volatility near some of the lowest levels that we've seen in several years. And yet we've also seen some mixed economic data to start the year. So as you look out into 2024, what are the major risks that you're focused on? Lisa Shalett: Well, I think one of the first things that, you know, we're trying to impress upon our clients, who tend to be long term, who tend to be multi-asset class investors, very often owning a simple classical 60/40 portfolio, is that we've been in this very interesting potential regime change, where both bonds and stocks are sensitive to the same thing. And that is the level and rate of change of interest rates. And that's meant that the 60/40 portfolio and stocks and bonds are actually positively correlated with one another. And so the very first thing we're talking to clients about is the extent to which we believe they need to focus on diversification. I think a second factor that we're talking, you know, to clients a lot about is liquidity. Now in the macro sense, we know that one of the reasons that markets have been able to resist some of the pressure is coming from the fed. Raising rates 550 basis points in kind of 15, 16 month period has been because there have been huge offsets in the macro backdrop providing liquidity to the marketplace. So we're talking about the fact that some of those supports to liquidity may, in fact, fall away and go from being tailwinds to being headwinds in 2024. So what does that mean? That means that we need to have perhaps more realistic expectations for overall returns. The third and final thing that we're spending a lot of time with clients on is this idea of what is fair valuation, right? In the last eight weeks of the year, clients were, you know, very I think enamored is probably the right word with the move in the last eight weeks of the year, of course, people had, you know, the fear of missing out. And yet we had to point out that valuations were kind of reaching limits, and we therefore haven't been shocked at this January, the first couple of weeks, markets have maybe stalled out a little bit, having to kind of digest the rate that we've come and the level that we're at. So those are some of the themes that, you know, we've begun to talk about, at least with regard to portfolio construction. Andrew Sheets: So, Lisa, that's a great framing of it. You know, you mentioned the importance of rates to the equity story, this unusually high correlation that we've had between bonds and stocks. And you have this debate in the market, will the Fed make its first rate cut in March? Will it make its first rate cut in June, like the Morgan Stanley research call is calling for? Is tha