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Global Equity Strategy

March 3, 2015

Stuart Freeman, CFA®, Co-Head of Global Equity Strategy
Scott L. Wren, Senior Global Equity Strategist

Analysis and outlook for the equity market

  • Our analysis of leading economic indicators suggests a U.S. economy that is still in mid-recovery and equity markets that have more room to run.
  • The Conference Board's Leading Economic Index (LEI) and our projections add confidence to our expectations of more equity upside and better potential in cyclically-sensitive issues that can benefit from economic growth.

What it may mean for investors

  • While investors are not as fearful as they were some quarters ago, they also are not feeling exuberance over the economy or markets. We continue to favor stocks over longer-maturity bonds, and recommend that long-term investors favor companies and sectors that can benefit from continuing cyclical growth (as opposed to defensive issues).

A Forward-Looking Take on a Broad Leading Economic Indicator

The Conference Board’s LEI continued to move higher in January with eight out of ten components adding to its growth. In Chart 1, we have plotted the performance of this index (in green) and our forward-looking projection for it (in purple) based upon its relationship to a breadth of other economic and market indicators.

Chart 1: Conference Board LEI and Wells Fargo LEI Estimate 
 Chart 1: Conference Board LEI and Wells Fargo LEI Estimate
Source: FactSet, The Conference Board, Wells Fargo Investment Institute (WFII), 3/2/15. The WFII estimate is highlighted in the yellow circle.

Over the 12-month period ending on January 31, 2015, the LEI increased by 6.5 percent relative to a long-term range of between -20 percent and +14 percent over 12-month periods from early 1980 to today. If we look back through this history, when the LEI had an annual increase between 6.2 and 6.8 percent, the average increase for the S&P 500 Index was roughly 11 percent over the following year. During these specific periods, the S&P 500 Index tended to move higher 82 percent of the time with an average increase of 13.9 percent (and a long-term range of 0.6 to 39.4 percent). During these periods, the S&P 500 Index tended to show a decline only 18 percent of the time (with an average decline of 0.8 percent (and a range of -0.02 percent to -2.1 percent).

The one-year periods that produced the preponderance of 6.2-6.8 percent LEI increases between early 1980 and today included late 1984, mid-to-late 1993, mid-1994, early 1998, and late 2010. None of these periods represented end-of-cycle economies, and most of them were relatively early within their economic cycles.

Overall, the performance of the LEI over the past year suggests a statistically-favorable path for broad U.S. equity market performance in the next year. We modeled a forward-looking estimate for the LEI (highlighted in a yellow circle on the graph). Based upon the fundamental environment we are experiencing, our work suggests the LEI likely will move roughly 4.4 percent higher in the one-year period between November 2014 and November 2015. Historically, when the LEI has increased by between 4.1 and 4.7 percent in a year, the forward-year upside for the S&P 500 Index averaged roughly 13 percent (in this case, between November 2015 and November 2016). Under this scenario, the S&P 500 Index was higher in 77 percent of instances (an average of 21 percent), but lower in 23 percent of instances (by an average of -13 percent).

This week's LEI analysis suggests that both this cyclical bull market and the U.S. economic recovery have more room to run. This conclusion remains in line with our work on the forward trajectory for job growth, consumer confidence, and spending. It also is aligned with our work on economic environments most similar to the current one, as well as our analysis of the market’s internal breadth.

We continue to recommend that investors maintain overweight positions within cyclically-sensitive sectors of the large-capitalization domestic equity market. We carry a year-end 2015 S&P 500 Index target range of 2150-2250.

Weekly Wrap and Look Ahead

For the week ending on February 27, most major domestic and international indices delivered positive returns. The S&P 500 Index had a nominal weekly decline and the Dow Jones Industrial Average was flat. All major equity indices delivered positive year-to-date returns through February 27.

Index Last week's performance1 2015 YTD performance
S&P 500 -0.3% +2.2%
DJIA +0.0% +1.7%
NASDAQ +0.2% +4.8%
Russell 2000 +0.1% +2.4%
MSCI EAFE +1.1% +6.5%
MSCI Emerging Markets +0.6% +3.7%

1 For the week of February 23 – February 27, 2015
Source: Wells Fargo Investment Institute, Bloomberg, FactSet, 2/27/15.

Looking at S&P 500 sector performance, five of 10 sectors outperformed the Index and four of 10 managed to gain ground for the week.

Best Performing Sectors Last week's performance2 Worst Performing Sectors Last week's performance2
Telecom Services +1.0% Energy -2.0%
Consumer Staples +0.8% Utiities -1.2%
Consumer Discretionary +0.6% Industrials +1.1%

2For the week of February 23 – February 27, 2015
Source: Wells Fargo Investment Institute, Bloomberg, 2/27/15.

Greece, for now, has moved to the back burner. U.S. economic data has taken that country’s place as a headline generator. This week’s economic calendar features a number of reports that will be closely watched by investors. These include construction spending, the Institute for Supply Management (ISM) manufacturing and service sector surveys, vehicle sales and initial jobless claims. However, the most important report of the week is Friday’s employment report covering the month of February.

Right now, most economic reports are judged by how much influence they might have on Federal Reserve (Fed) plans to hike interest rates. This week’s employment report is no exception. We would argue that Chairwoman Yellen took a more dovish stance in last week’s testimony to Congress. The Fed will be closely watching components of the employment report for indications that average hourly earnings are rising along with the average work week. Net new non-farm payroll jobs added last month are expected to come in at 235,000, but we would consider anything above 200,000 to be a "good" number. If average hourly earnings show a more-than-expected 2.3 percent rise over the last 12 months, the markets likely will be churning and volatile in response. Wage pressure is typically a big factor when attempting to predict future inflation.

Sector S&P Weighting* Wells Fargo Investment Institute Guidance
Consumer Discretionary 12.5% Overweight 13.4%
Consumer Staples 9.7% Underweight 8.5%
Energy 8.1% Neutral 8.0%
Financials 16.1% Neutral 16.5%
Health Care 14.7% Neutral 14.8%
Industrials 10.3% Overweight 11.6%
Information Technology 19.9% Overweight 21.8%
Materials 3.3% Neutral 3.0%
Telecom Services 2.3% Neutral 2.4%
Utilities 2.9% Underweight 0.0%
S&P 500 earnings estimate for 2015 $128.00
S&P 500 year-end 2015 target range 2,150-2,250

*Sector weightings are as of 3/2/15 close. Weightings may not add to 100% due to rounding.
Source: Wells Fargo Investment Institute, Bloomberg, 3/2/15.

Stuart FreemanAbout Stuart Freeman

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.

Scott WrenAbout Scott Wren

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.

*As of Sept. 30, 2014

Risk Factors

Past performance is no guarantee of future results.

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

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

An index is unmanaged and not available for direct investment.

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.

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

NASDAQ 100 Index 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.

MSCI EAFE® Index (Europe, Australasia, Far East) is an unmanaged group of securities widely regarded by investors to be representations of the stock markets of Europe, Australasia and the Far East.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey as of November 2013.


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 you existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name use 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.