Apart from the major indexes like the S&P 500, markets are behaving like it is late in the cycle, says Morgan Stanley strategist

You would have a hard time convincing someone looking at the major U.S. stock-market benchmarks that it is looking like the end of the cycle.

The S&P 500 SPX, +0.18%, for instance, has registered 12 record closes this year, climbed 15 out of the last 19 weeks and has gained 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 RUT, -0.36% and a 10% gain for the MSCI World ex-USA 664211, +0.00%.

The iShares iBoxx investment-grade corporate bond ETF LQD, +0.24% has gained 16% over 12 months, compared with a 9% return for the SPDR Bloomberg Barclays high-yield bond ETF JNK, +0.05%.

Gold GC00, -0.12% futures have climbed 18% over 12 months, compared with a 6% decline for crude-oil CL.1, +0.04% futures.

“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 writes.

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 suggests maintaining more balance until these issues are resolved, as the broker is “strategically neutral” toward global credit and equities.

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