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Equity Markets Worry About Policy, Growth: What to Do

Wells Fargo Investment Institute - December 21, 2019

Key takeaways

  • Stocks have continued to react negatively to the Federal Reserve’s December 19 policy meeting and a variety of concerns relating to the economy’s potential growth next year.
  • We do not know where this correction will end, but this correction is pricing in a recession that we do not think will occur. We view the selloff as overdone.

What it may mean for investors

  • Investors may be starting to get exhausted from so much selling, and they may be inclined to sell their own holdings out of fear. Instead, we favor staying invested as the economic expansion continues, rebalancing, and using cash to fund reallocations—even incrementally. Patience and a disciplined plan can make this step most effective.


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Stocks have continued to react negatively to the Federal Reserve’s (Fed) December 19 policy meeting and a variety of concerns relating to the economy’s potential growth next year. More uncertainties remain to be resolved. Politics and policy should remain front-of-mind for markets. The fixed income markets look for only one more rate hike, while the survey of Fed policy makers projects a median of two rate hikes in 2019. Political impasse in Washington, London, and elsewhere prolong concerns about political impediments to the global economy. Finally, investors will closely watch fourth-quarter earnings for hints on future earnings.

No time to panic

We have conviction that now is not a time to panic. This correction represents a statistically significant move in equity prices in 90 days, a rare move historically and one that tends to create buying opportunities.  We do not know where this correction will end, but this correction is pricing in a recession that we do not think will occur. We view the selloff as overdone. 

That said, the longer the selloff persists, the more evidence the markets may demand in order to believe that a durable market recovery is in progress. From a sentiment or technical standpoint, the decline through the February lows (2530–2580) was disappointing and opens the door for further downside. (See Chart 1.) The next area of support will come in around the summer/fall 2017 lows (2410–2430), an area in which the markets spent time consolidating before tax reform efforts picked up steam.

Chart 1. S&P 500 Index (SPX) along with the 50-day and 200-day SPX moving averages


Chart 1. S&P 500 Index (SPX) along with the 50-day and 200-day SPX moving averages

Sources: Bloomberg and Wells Fargo Investment Institute; December 20, 2018. The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market. It is not possible to invest directly in an index. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

What investors can do now

Investors may be starting to get exhausted from so much selling, and they may be inclined to sell their own holdings out of fear. Instead, we favor taking several steps to manage within the current circumstances:

Keep investment goals front of mind: From March 2009 – November 2018, the S&P 500 Index gained 361% on a total return basis—even with most of the latest correction. A portfolio with similar equity returns could leave a portfolio so concentrated in equities that total risk far exceeds its original goal. Meanwhile, the investor is almost 10 years older and may have less risk appetite today. An investor, who can be patient as the current selloff resolves itself, could review the target risk for the portfolio. This also applies to relatively new investors. Even an equity exposure that dates only from January 2016 has seen the S&P 500 Index total return mark 43%, and risk may be higher than intended. 

Manage risk: We expect higher global equity and commodity prices into year-end 2019. However, the aging cycle should create more volatility and opportunities to rebalance (i.e., to sell at high levels and to reallocate to our more favored sectors or markets). For example, as U.S. large-cap equities rebound and take the S&P 500 Index into our 2019 target range (2,860-2,960), investors may have a chance to lighten large-cap exposure and to reallocate. In sectors, we favor cyclical sectors (Industrials and Financials), as well as Information Technology, Health Care, and Consumer Discretionary. We would reallocate from Utilities (which have outperformed the S&P 500 Index during the correction), Real Estate, and Communication Services. Among other equity markets, we favor U.S. mid caps, and we particularly favor emerging markets. 

Let cash be a tool, not a goal: Rebalancing should generate cash, but rising interest rates can tempt investors to leave the money in cash alternatives. We favor not treating cash buildup as an objective but as a means to deploy cash. As the uncertainties fade, invested cash has a greater potential to outperform a cash position. While markets remain turbulent, we favor deploying cash incrementally. Patience and a disciplined plan can make this step most effective.