Global Equity Strategy
September 29, 2015
Stuart Freeman CFA®, Co-Head of Global Equity Strategy
Sean Lynch CFA®, Co-Head of Global Equity Strategy
Mark Litzerman CFA®, Co-Head of Real Asset Strategy
Scott Wren Senior Global Equity Strategist
Analysis and outlook for the equity market
- We are reducing all of our year-end 2015 equity targets.
What it may mean for investors
- These adjustments reflect our belief that recent market corrections have pushed out the time frame for further equity gains. We recommend that investors look to 2016 as a year in which we expect higher earnings and attractive equity returns from current levels.
Lowering Our Year-End 2015 Equity Target Ranges
We are reducing our year-end target ranges for a number of equity indices due to the corrections we have seen since August 2015, and as year-end is only roughly three months away.
We do not want investors to expect rapid snapbacks to our current target ranges by year-end. Yet we also do not want investors to believe that these delays in returns represent an end to our expectation that these levels can be attained. We believe the recent market corrections have pushed out the time frame for further gains. Market pullbacks came with continuing concerns around growth in the emerging markets. Soft growth has continued to result in less demand versus supply for many industrial commodity and energy products. By August, the Federal Reserve (Fed) had increased its emphasis on emerging-economy weakness. Shortly thereafter, China’s currency devaluation resulted in investor consternation and increased market volatility. Finally, while less than half of investors expected the Fed to raise the fed funds rate this month, some investors are concerned that they did not, while others are concerned that they gave little guidance for when an initial increase may occur.
In the emerging markets, we believe profit growth should rebound from four disappointing years. It is still well below peak levels. The potential catalysts for better profitability in the emerging markets would be stabilization of the three Cs— commodities, currencies and China. Further, we believe that China, Korea and Taiwan are the key countries to watch in the emerging markets as investors seek to gauge improvement.
Profit growth in the developed international markets continues to reflect improving conditions. However, increasingly, micro factors will drive these markets. The focus continues to be on delivering strong profit growth with low gross domestic product (GDP) and revenue growth in these markets. In these markets, we believe that the key countries to watch are Germany and Japan.
Throughout this period, volatility has moved to more normal long-term levels than we experienced during much of this economic cycle (during periods when the Fed was either reducing rates or executing quantitative-easing (QE) programs in an effort to inject liquidity into the economy). For some time, we have expected more normal volatility levels as QE programs end and as investors anticipate fed funds rate increases. However, inflation and inflation expectations continue to be manageable, and this is a supportive backdrop for equities. In our opinion, stocks remain more attractively priced relative to fixed-income vehicles and cash.
While we are reducing our year-end 2015 target ranges for these equity indices, we believe that investors will become more comfortable with equity risk in 2016 as the economy benefits from easier earnings comparisons, especially within the Energy sector. Other economic segments should experience somewhat better revenue growth and/or margin expansion due to low energy and commodity prices next year as well. We also believe that there is opportunity for better equity performance in the mid-October through December season during mid-cycle. Frequently, by mid-October, institutional window-dressing for year-end has taken place, and most investors begin to look forward into the next year.
Nonetheless, with year-end 2015 only three months away, we want to reduce our expectations for the very near term. We recommend that investors look to 2016 as a year in which we expect higher earnings and attractive equity returns from current levels.
Adjustments to Our Year-end 2015 Equity Target Ranges
|Equity Index||Previous Year-end 2015 Price Target||Revised (Current) Year-end 2015 Price Target|
|S&P 500 Index||2150-2250||2025-2125|
|Russell Midcap Index||1685-1785||1625-1725|
|Russell 2000 Index||1160-1240||1125-1225|
|MSCI EAFE Index||1950-2050||1700-1800|
|MSCI Emerging Markets Index||860-940||800-880|
Sources: Wells Fargo Investment Institute, 9/25/15.
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|
|MSCI Emerging Markets||-4.9%||-15.6%|
1For the week of September 21 - September 27, 2015
Sources: Wells Fargo Investment Institute, Bloomberg, 9/28/15
Seven of 10 S&P 500 Index sectors outperformed the Index while three of 10 managed to gain ground for the week.
|Best Performing Sectors||Last week's performance2||Worst Performing Sectors||Last week's performance2|
2For the week of September 21 - September 25, 2015
Sources: Wells Fargo Investment Institute, Bloomberg, 9/28/15
Past performance is no guarantee of future results.
This Friday’s report employment data covering September will be the most important economic report of the week, but investors will also be paying close attention to a number of Fed officials who are scheduled to speak publicly in the coming days. We continue to expect the Fed to lay the groundwork for a December interest-rate hike and look for most Fed officials to get on the rate hike bandwagon when giving speeches or making public comments.
After the comments from multiple Fed governors over the weekend of September 19-20, and Chairwoman Yellen’s remarks on September 24, the financial markets should be well on the way to accepting that a rate hike in December is a high-probability outcome. We believe that this is likely now that investors are focusing on global growth in the near term and specifically on the magnitude of any slowdown in China. It would not surprise us if the markets pay more attention to Chinese economic data in coming weeks as this uncertainty gets a further vetting on a weekly, and sometimes daily, basis. Our international team views the concerns over a severe slowdown in Chinese growth as overdone and is looking for stabilization in the coming months.
We are in what is typically a seasonally volatile time in the equity markets. We continue to view the domestic recovery as dependable and modest. On the developed international front, we look for better economic performance in the Eurozone and Japan as we move through the balance of this year and into 2016.
|Sector||S&P Weighting*||Wells Fargo Investment Institute Guidance|
|S&P 500 earnings estimate for 2015||$122.00|
|S&P 500 year-end 2015 target range||2,025-2,125|
*Sector weightings may not add to 100% due to rounding. Weightings as of 9/28/15 close. Targets are not guaranteed and may change.
Sources: Wells Fargo Investment Institute, Bloomberg, 9/28/15.
Stuart Freeman 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 role, Mr. Freeman identifies potential long-term buying opportunities within the equity markets by analyzing sub-industries and broader market sectors. He also produces cross-analyses of recent versus historical economic landscapes, and develops equity market earnings projections and price target ranges. Mr. Freeman is frequently quoted in the national media, including The Wall Street Journal, USA Today, Forbes, Money, Bloomberg News, CNBC, Fox Business, and MarketWatch. Mr. Freeman began his career at Wells Fargo predecessor firm A.G. Edwards in 1982 as a securities research analyst following the healthcare industry. He has extensive experience communicating his investment views to various audiences through written publications, presentations, and media appearances.
Mr. Freeman earned a joint Bachelor of Science in Business Administration/Master of Business Administration with a concentration in Finance from Washington University in St. Louis. He is a CFA® charterholder and member of the St. Louis Society of Financial Analysts. Mr. Freeman is based in St. Louis, Missouri.
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.
Mark Litzerman is the co-head of real asset 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.
Mr. Litzerman is part of the leadership team that develops strategic and tactical asset allocation recommendations and market commentary for real assets, which includes real estate investment trusts (REITs) and master limited partnerships (MLPs) as well as global equities, with specific responsibility for small and mid-cap U.S. stocks. He also leads a team that provides global equity market research and analytics for WFII, as well as marketing and data support for proprietary large-cap U.S. growth, value, global highdividend yield, and U. S. REIT strategies. With his knowledge of investment strategy, Mr. Litzerman is a frequent contributor to WFII publications and has been quoted in various media outlets.
Prior to joining Wells Fargo in 2006, Mr. Litzerman served in a variety of investment strategy positions including director of research and chief investment officer for Hale & Dorr Capital Management, portfolio management team leader for Mellon Private Asset Management, and director of equities for First NH Investment Services. He has more than 3o years of experience in financial services.
Mr. Litzerman earned a Bachelor of Arts in Communications from Purdue University, a Master of Business Administration in Finance from the University of New Hampshire, and is a CFA® charterholder. He is based in Charlotte, North Carolina.
Scott Wren is a senior global equity strategist 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.
Mr. Wren produces strategy and guidance recommendations for global equities. With his knowledge of the financial markets, he is often quoted in national media outlets including Reuters, The Chicago Tribune, The Los Angeles Times, The Washington Post, The Associated Press, and The Wall Street Journal. He has appeared in interviews on CNBC, Bloomberg TV, Fox Business News, and Nightly Business Report. Prior to joining Wells Fargo Advisors predecessor A.G. Edwards in 1998, Mr. Wren worked as a senior foreign exchange dealer for The Boatmen’s National Bank of St. Louis. He began his career on the trading floor of the Chicago Mercantile Exchange and has more than 25 years of experience in financial services.
He received a Bachelor of Science in Business Administration from the University of Kansas and a Master of Finance from Saint Louis University. He is located in St. Louis, Missouri.
There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change.
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.
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.
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.
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.
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