Monthly Investment Outlook - Equities – A roller coaster since September 2018

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Equities – A roller coaster since September 2018

Wells Fargo Investment Institute - April 2019

The stock market has taken investors on a roller coaster ride.

Transcript: Equities – A roller coaster since September 2018

Title graphic: A roller coaster since September 2018

Since the S&P 500 hit an all-time record high back in late September of 2018, the stock market has taken investors on a roller coaster ride. From that record high, stocks fell nearly 20% over the balance of the year with 16% of that tumble taking place between December 3 and the market’s Christmas Eve close. Since that low, the S&P 500 rallied more than 20% and at the end of the first quarter was trading at or near what we would consider to be “fair value.”

Title graphic: Time to rethink portfolio risk

Given this big rebound in stocks and the risks we currently perceive surrounding trade uncertainty and global economic growth, our Investment Strategy Committee decided in early March that it would be prudent to reduce portfolio risk, at least for the time being. As a result, we downgraded our rating for U.S. large and mid-cap equity asset classes to Neutral from the previous Favorable rating. Back in late January, we downgraded U.S. small-cap equities. Both actions were taken in an attempt to de-risk portfolios at a time when we see markets at an inflection point. In other words, depending on how uncertainties are resolved in the next few months, prices could go up or down.

Title graphic: Our outlook for 2019

So, do we believe the economic expansion is over? No. In fact, we remain fully allocated to equities overall at recommended strategic levels. In other words, we believe investors should stay invested. We continue to rate Emerging Markets as our Most Favorable asset class and believe this segment offers best return potential over the balance of the year. We expect economic and earnings growth this year in the U.S. to be slower than last. This year, we expect earnings to grow approximately 7%, which is approximately in line with the longer term S&P 500 average. We believe earnings growth in the emerging markets should come in above 10%.

At a sector level, we continue to lean toward those that have potential to benefit from a continuation of the expansion. We view recession as a low probability over the next 12 months. Among our favorite sectors are Information Technology, Industrials and Consumer Discretionary.

We recommend investors review their equity portfolios for rebalancing opportunities. Investors may find opportunities to shift funds from those equity asset classes that have done well in their portfolios in recent years—U.S. large cap stocks, for example—to asset classes with more potential, like emerging markets.

Risk Considerations

Different investments offer different levels of potential return and market risk. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks.

Sector Risks

Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks smaller, less-seasoned companies, tend to be more volatile than the overall market.

General Disclosures
The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request. 

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. 

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

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