The Fed Looks Ready to Push the Button. Get prepared for rising interest rates. Request your free report.

Global Equity Strategy

August 25, 2015

Sean Lynch CFA®, Co-Head of Global Equity Strategy

Analysis and outlook for the equity market

  • This week, the S&P 500 Index entered correction territory for the first time in more than four years.
  • All major domestic and international benchmark equity indices have now experienced corrections year to date in 2015.

What it may mean for investors

  • This market action gives us concern, but has not changed the fundamentals. We favor capitalizing upon volatility to reposition toward U.S. large-cap and international developed equities.

Four Years and No Longer Counting—An S&P 500 Correction

The S&P 500 Index finally entered correction territory (a 10 percent decline from a prior high) this week. It had been four years (April 2011) since it had suffered a 10-percent correction. The S&P 500 closed at 1893 on August 24—an 11 percent decline from its recent high of 2130 reached on May 21. This large-cap benchmark joins mid-cap, small-cap, emerging-market and international developed equities in registering a decline of 10 percent or more this year. Since 1928, a U.S. equity-market correction has taken place on average every 11 months, so this correction-less market was getting long in the tooth.

Additionally, many global indices are now well off their highs for the year. The primary culprits behind the recent declines are fears that global growth is slowing, China’s economy is becoming more unstable, and commodity prices are weakening.

Our view is that global growth is slowing but not collapsing. China is in a state of transforming its economy, which is going to result in market disruptions and inconsistent data and policy actions. As a result of the volatility in financial markets, on August 24, in a tactical shift, we moved two percent out of high-yield debt and positioned that two percent toward large-cap equities. We continue to be overweight large-cap U.S. stocks and international developed equities. We remain neutral on emerging market, mid-cap, and small-cap equities.

Table 1. Equity-Market Forecasts for 2015 
 Table 1. Equity-Market Forecasts for 2015
Source: Wells Fargo Investment Institute, Bloomberg, 8/24/15. Forecasts are not guaranteed and may change.

We increase our preference for large-cap stocks

Large-cap domestic stocks currently have strong balance sheets, and earnings should benefit from improving economic conditions in the U.S., Europe, and Japan. We recently lowered our U.S. large-cap earnings forecast, but still believe that large-cap earnings growth in the second half of the year will be higher than in the first half of 2015. Energy has been a drag on earnings to date in 2015, but we believe the lower oil and commodity costs should help to boost margins in many other sectors later this year. The lower energy costs, improved housing market, and steady labor conditions also should result in increased confidence around consumption. We still see strong upside to our year-end, large-cap price target—with the biggest risks being a step back in the earnings outlook or a deterioration in economic fundamentals.

We also continue to be overweight on international developed stocks. These markets also had a rough week as investors worry about the knock-on effects of a slower China. Export-oriented economies like Germany caught the brunt of the decline. The German Dax declined 4.7 percent on Monday and is down 22 percent from the high it reached on April 10 of this year. There have been some concerns that recent weak data readings out of China could place downward pressure on the Eurozone (and broader European) economy, but improving Manufacturing and Services Purchasing Managers’ Index (PMI ) reports, combined with positive export growth from the region to China, continue to reflect expanding economic activity in the Eurozone.

We keep emerging-market stocks neutral and resist the temptation to add

Emerging markets have been the epicenter of the recent decline. In an environment of dollar strength, languishing commodities, and weak equity markets, these headwinds could strengthen or at least remain for a while. Even though a number of emerging markets and currencies are touching multi-year lows, we would resist adding exposure to these markets. The transition of China from a manufacturing economy to one in which services and consumption become the driver was never going to be easy. China’s slowing growth has implications for its trading partners ranging from Southeast Asia to Latin America and Europe. The seemingly uncoordinated actions by the People’s Bank of China (PBoC) and other government bodies has people questioning whether Chinese authorities even have a plan right now to fuel growth. A strong enough policy response from China or other emerging-market economies may help to get the group out of its recent woes. This morning, China cut interest rates and reduced the reserve requirement ratio that banks must set aside, resulting in a strong rally for global equities. However, as we have seen this summer, it is tough—and so far unrewarding—to place hope in the plans of emerging-market central banks and officials.

The recent market action gives us concern, but underlying fundamentals have not changed. Therefore, we would take advantage of the recent weakness and volatility to reposition toward U.S. large-cap and international developed equities.

Weekly Wrap and Look Ahead

All major domestic and international indices were negative for the week and year to date.

Index Last week's performance1 2015 YTD performance
S&P 500 -5.8% -4.3%
DJIA -5.8% -7.6%
NASDAQ -6.8% -0.6%
Russell 2000 -4.6% -4.0%
MSCI EAFE -4.6% -1.0%
MSCI Emerging Markets -5.9% -13.3%

1For the week of August 17 – August 21, 2015
Sources: Wells Fargo Investment Institute, Bloomberg, 08/21/15

Seven of 10 S&P 500 sectors outperformed, but all of the sectors lost ground for the week.

Best Performing Sectors Last week's performance2 Worst Performing Sectors Last week's performance2
Utilities -1.2% Energy -8.7%
Telecom Services -2.6% Information Technology -7.4%
Consumer Staples -4.8% Financials -5.9%

2For the week of August 17 – August 21, 2015.
Sources: Wells Fargo Investment Institute, Bloomberg, 08/21/15

This week, the stock market will be trying to find its footing in the wake of last week’s major selloff. The spark that set off the market’s reaction was China’s PMI survey that is a gauge of manufacturing activity. Investors expected a weak number, but the actual result was slightly below expectations.

The fear over the magnitude of any potential global slowdown in economic growth is driving financial markets right now in this traditionally low-volume period (the month of August). In our opinion, China’s economy is stabilizing at a lower growth rate in response to the government’s efforts to shift that country’s economy from one reliant upon exports to one that is more dependent on domestic consumption. We are looking for economic growth of 6.8 percent in China this year versus the government’s target of seven percent.

This week, we expect the stock market to be volatile. Economic reports of interest include the Case/Shiller Home Price Index, new home sales, consumer confidence and the first revision to second-quarter gross domestic product (GDP) (initially reported as 2.3 percent). Investors will be looking at each of these reports and determining how the results will affect the Federal Reserve’s (Fed) decision to alter monetary policy at the September (16/17) Federal Open Market Committee (FOMC) meeting. Given the selloff in global stock markets and turmoil in emerging and commodity markets, we suspect that the probability of a rate move next month has diminished to some extent.

Sector S&P Weighting* Wells Fargo Investment Institute Guidance
Consumer Discretionary 12.8% Overweight 13.4%
Consumer Staples 9.8% Underweight 8.5%
Energy 6.8% Neutral 8.0%
Financials 16.7% Neutral 16.5%
Health Care 15.5% Neutral 14.8%
Industrials 10.1% Overweight 11.6%
Information Technology 19.6% Overweight 21.8%
Materials 2.9% Neutral 3.0%
Telecom Services 2.5% Neutral 2.4%
Utilities 3.2% Underweight 0.0%
S&P 500 earnings estimate for 2015 $122.00
S&P 500 year-end 2015 target range 2,150-2,250

*Sector weightings may not add to 100% due to rounding. Weightings as of 08/24/15 close.
Sources: Wells Fargo Investment Institute, Bloomberg 2015.

Sean LynchAbout Sean Lynch

Sean Lynch is the co-head of global equity strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

In his current role, Mr. Lynch is responsible for developing global equity strategy and oversees proprietary equity strategies as well as the equity trading desk. He has represented Wells Fargo to the media on numerous occasions, providing insights and perspectives on the global markets. He has also written extensively about global issues and the implications on client portfolios, appearing in Bloomberg, The Wall Street Journal, USA Today, Money, and on CNBC.

Mr. Lynch has been with Wells Fargo for 17 years. Prior to his current role, he served as a global investment strategist for Wells Fargo Private Bank. He has traveled extensively internationally—from Asia to South America to Europe—to gather firsthand knowledge and information, and has shared his observations and perspectives with clients and team members. He has been in the investment management and trust industry for 24 years.

Mr. Lynch earned a Bachelor of Science in Business Administration, specializing in Accounting and Finance, from the University of Nebraska-Omaha. He is a CFA® charterholder and a former president of the Omaha-Lincoln Society of Financial Analysts. Mr. Lynch is located in Omaha, Nebraska.

*As of Sept. 30, 2014

Risk Factors

Any investment in the stock market should be made with an understanding of the risks associated with investments, including market fluctuations.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

The prices of small- and mid-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.

An index is unmanaged and not available for direct investment.


DJIA is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

German Dax is a stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange.

Manufacturing and Services Purchasing Managers’ Index (PMI) - Purchasing Managers' Indices (PMI) are economic indicators derived from monthly surveys of private sector companies. Markit Group and the Institute for Supply Management separately compile The Purchasing Managers' Index (PMI) surveys on a monthly basis by polling businesses that represent the makeup of the respective sector. The surveys cover private sector companies, but not the public sector.

MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

NASDAQ is an unmanaged group of the 100 biggest companies listed on the NASDAQ Composite Index. The list is updated quarterly and companies on this Index are typically representative of technology-related industries, such as computer hardware and software products, telecommunications, biotechnology and retail/wholesale trade.

The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000® Index.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.

The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market. The Index is unmanaged and not available for direct investment.


Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. (“WFII”). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the GIS division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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.

Wells Fargo Advisors is registered with the U.S. Securities Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company.