Navegó a una página que no está disponible en español en este momento. Seleccione el enlace si desea ver otro contenido en español.

Página principal

Markets Recalibrate for Slower Recovery

Wells Fargo Investment Institute - April 22, 2020

by Sameer Samana, CFA, Senior Global Market Strategist

Key takeaways

  • A drop in the May West Texas Intermediate crude oil futures contract to negative levels on April 20, seemed to shake the complacency that had developed in equity markets over the past few weeks.
  • For oil and equity markets, negative oil prices leave investors rethinking the timing and strength of the recovery in the economy, in oil demand, and in equity market pricing.

What it may mean for investors

  • We continue to expect that the bottoming process for equity markets will take some time and require patience on the part of investors. We recommend investors update their investment plans, and ensure they are not overextended in riskier assets, such as U.S. small-cap equities, developed-market equities, and emerging-market equities, and the Energy, Materials, and Industrials sectors.

In the past few weeks, we have been cautioning that the market’s sharp snapback from recent lows—at one point the S&P 500 Index was up more than 31%—was beginning to discount a much sharper recovery than our base case for a short, but deep, recession in the coming quarters. Consider for a moment that at the recent high of 2879 on April 17, the S&P 500 Index was less than 1% away from its closing price on April 17 of 2019. While we did not know what would derail the market’s hopes for a quick, V-shaped recovery, we have said for some time that bottoming is a process and will take some time.1

A drop in the price of West Texas Intermediate (WTI) crude oil to negative levels on the May contract (June and the out months remain positive, although down sharply from recent highs) seems to have been the catalyst for investors to start repricing riskier assets. While the crude oil move was exacerbated by the lack of adequate storage capacity, we believe that the underlying issue is the precipitous decline in economic activity and oil demand. Put another way, an abrupt recovery in economic activity and oil demand may only develop gradually. 

For the oil markets, this realization likely means that there will be further supply reduction – including more financial stress in the oil industry. For equity markets, we continue to expect that the path to further gains will involve more setbacks before an economic recovery and a more sustainable rally take hold. We continue to expect an economic recovery to develop in the second half of 2020, but investors may need patience, while lingering uncertainties create the possibility for further disappointment and volatility during this consolidation phase.

Implications for investors

  • With equities still trading close to fair value and toward the upper end of their recent trading range, we recommend investors update their investment plans, and ensure that they are not overextended in riskier assets, such as U.S. small-cap equities, developed-market equities, and emerging-market equities, and the Energy, Materials, and Industrials sectors.
  • We would wait for a more meaningful pullback toward the lower end of the trading range and look to patiently add exposure to U.S. large- and mid-cap equities, and the Information Technology, Communication Services, Consumer Discretionary, and Financials sectors. Our report on the bottoming process for equity markets—“The Bottoming Process—A Step-by-Step Guide” (March 20, 2020)—may provide additional color.

Download a PDF version of this report

1 Please see, our Institute Alert report, “The Bottoming Process – A Step-by-Step Guide”, March 20, 2020.