Analysis and outlook for the equity market
- We believe that record highs in the U.S. equity markets, and the Dow Jones Industrial Average (Dow) crossing 20,000 today, are largely based on improving fundamentals in the economy and with earnings.
What it may mean for investors
- We recommend that investors keep U.S. Large Cap Equity exposure at targeted levels. We continue to favor the Consumer Discretionary, Industrials, Health Care and Financials sectors.
Crossing Dow 20,000 can be a psychological, emotional, and technical development for investors; however, there is nothing magical about this level. In the very near term, some short-term traders may make trades near and around new market levels (or index levels that end in zeros.) Yet, investors should keep in mind that underlying fundamentals and valuations offer the backdrop for index levels. We would not trade on the Dow 20,000 number itself. We also have no plans to adjust our equity weightings at this time.
It is always important to periodically review and rebalance your portfolio exposure, and the Dow 20,000 milestone marks a good time for this review. Wells Fargo Investment Institute moved to evenweight (neutral) on U.S. Large Cap Equities at the start of 2017. We are not negative on equities. Yet, for investors whose large-cap exposure has run ahead of its targeted weight, we would recommend paring it back to the targeted level.
The fact that the Dow has hit a 20,000 level does reflect some renewed optimism on the part of U.S. investors. We believe that the domestic economy and earnings environment were improving prior to the election, but the new administration certainly has helped some sectors that had been lagging—such as Financials. The prospect of less regulation and a steeper yield curve has helped the Financials sector, and new policies could favorably impact additional segments of the economy over time.
- Investor, business and consumer optimism is rising as we hit new equity-market highs. Investors can feel good about the Dow hitting 20,000. However, the best news is that fundamentals are improving and are unlikely to leave that trajectory in the near term. While investors were concerned early last year that an earnings recession would persist, earnings are likely to have their second quarter of growth (likely 4-6 percent) for the fourth quarter of 2016, and we expect them to trend upward in 2017.
- We remain evenweight on U.S. Large Cap Equities because valuation has moved slightly ahead of the historical median and because yields on bonds have started to become more competitive. Equity valuations can be pushed to higher levels as investors become more optimistic. Yet, we believe that markets will be driven by earnings this year, rather than through valuation expanding materially from these levels.
- We believe that investors should remain invested at targeted levels of large-cap equity exposure and avoid getting overextended in equities as the major U.S. indexes cross these milestone levels. For investors with larger amounts of cash, we recommend looking for pullbacks before putting additional money to work in equities. Dow 20,000 is a number, just like Dow 10,000 when it was achieved in March of 1999. >