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Feb. 22, 2020, 10:19 a.m. EST

Away from S&P 500 and other top indexes, markets are behaving as if it’s late in the cycle: Morgan Stanley strategist

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By Steve Goldstein, MarketWatch


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Where in the cycle is the current market?

You would have a hard time convincing someone looking at the major U.S. stock-market benchmarks that they’re giving the appearance of being at the end of the cycle.

The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.45% , for instance, has registered 12 record-high closes this year, climbed in 15 out of the last 19 weeks, and is up 23% from its 52-week low.

Yet Andrew Sheets, chief cross-asset strategist at Morgan Stanley, says there are late-cycle indicators in current markets.

“Historically, in the ‘downturn’ phase of our indicator, long-dated bonds outperform stocks. Defensive and large-cap equities (modestly) outperform cyclicals and small caps. U.S. stocks (modestly) outperform those in the rest of the world. Investment grade credit returns more than high yield. Precious metals outperform other commodities. All have been happening, not just year-to-date, but for the better part of a year,” he wrote in a note to clients.

The S&P 500 has gained 22% over 12 months, compared with just 8% growth for the Russell 2000 /zigman2/quotes/210598147/delayed RUT +4.62% and a 10% gain for the MSCI World ex-USA /zigman2/quotes/212253648/delayed XX:664211 +1.72% .

The iShares iBoxx investment-grade corporate bond ETF /zigman2/quotes/206919681/composite LQD +4.70% has gained 16% over 12 months, compared with a 9% return for the SPDR Bloomberg Barclays high-yield bond ETF /zigman2/quotes/202941311/composite JNK +6.71% .

Gold futures /zigman2/quotes/210034565/delayed GC00 +3.32% have climbed 18% over 12 months, compared with a 6% decline for crude-oil futures /zigman2/quotes/211629951/delayed CL.1 -7.70%  .

“It suggests that traditional approaches to the current cycle have been and are still providing useful information. They shouldn’t be discarded simply because the S&P 500 has remained strong,” Sheets wrote.

Morgan Stanley, it should be noted, advised clients to be underweight in early July, a call it reversed in mid-November.

And what should investors do? Sheets suggested maintaining more balance until these issues are resolved, as the broker is “strategically neutral” toward global credit and equities.

/zigman2/quotes/210599714/realtime
US : S&P US
2,789.82
+39.84 +1.45%
Volume: 0.00
April 9, 2020 5:15p
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/zigman2/quotes/210598147/delayed
US : US Composite
1,246.73
+55.06 +4.62%
Volume: 2.33M
April 9, 2020 6:31p
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/zigman2/quotes/212253648/delayed
XX : MSCI Global
756.32
+12.79 +1.72%
Volume: 0.00
April 9, 2020 9:26p
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/zigman2/quotes/206919681/composite
US : U.S.: NYSE Arca
$ 131.83
+5.92 +4.70%
Volume: 0.00
April 9, 2020 8:00p
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/zigman2/quotes/202941311/composite
US : U.S.: NYSE Arca
$ 101.64
+6.39 +6.71%
Volume: 0.00
April 9, 2020 8:00p
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/zigman2/quotes/210034565/delayed
US : U.S.: Nymex
$ 1,752.80
+56.30 +3.32%
Volume: 0.00
April 9, 2020 4:59p
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/zigman2/quotes/211629951/delayed
US : U.S.: Nymex
$ 22.76
-1.90 -7.70%
Volume: 0.00
April 9, 2020 4:59p
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Steve Goldstein is MarketWatch markets editor for Europe. Follow him on Twitter: @MKTWgoldstein.

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