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Global Investment Strategy

February 23, 2015 (Weekly Update)

Darrell Cronk, CFA®, President, CIO
Tracie McMillion, CFA®, Head of Global Asset Allocation

Weekly market insights from the desk of the Chief Investment Officer

  • We do not believe that recent weakness in U.S. economic data portends an end to the global equity bull market.
  • Cyclical stocks have surged ahead of more defensive stocks in 2015, a sign that the bull market could continue.

What it may mean for investors

  • Investors should overweight U.S. large-cap and developed-market stocks, while underweighting U.S. and developed-market bonds.

No Dying Bull

In recent days, global equity indices including the S&P 500 Index, the German DAX, the Japanese Nikkei, and the French CAC, have all set post-financial-crisis highs, even as some market observers insist that the equity bull market is dying. We disagree. There will invariably be bumps in the road. We believe some of those bumps are likely to be the Federal Reserve’s transition to a more normal interest-rate policy, political and economic instability in countries such as Greece and Ukraine, and the short-term volatility triggered by erratic daily economic reports of late.

Such uncertainties are prompting some analysts to lower their equity market forecasts. While economic data has become more mixed lately, we think the noise in the numbers stems from the sharp drop in energy prices over the past few months and the extremely cold weather in recent weeks. We believe these conditions should improve in the coming months, and the data could once again strengthen. Meanwhile, the situation in Ukraine may be deescalating, and Greece has obtained a short-term reprieve for its debt crisis.

Along with the global uncertainty, we concede that the U.S. may be near the midpoint of the economic recovery from a timing standpoint but likely beyond the midpoint from a total equity market return standpoint. Mid-cycle years, such as 1985, 1995, and 2003, traditionally have been prosperous periods for equity markets; however, at the same time, market movement and breadth typically become more reliant on earnings growth and capital flows at this point in the cycle. Currently U.S. equity markets are fairly valued and international markets are close to fair valuations by historical standards. Yet, most markets rarely trade at (or stay at) fair value. Instead, valuations tend to move from cheap to expensive (the bull continues) or expensive to cheap (the bull dies).

Let's take a deeper look at the implications for investors of the current market environment. Bull markets don't die of old age, rather they tend to succumb to things like runaway asset bubbles, over expansion of the cyclical sectors of an economy, or problematic inflation. None of these conditions are apparent in the market today. In fact, many cyclical sectors of the U.S. equity markets, including Consumer Discretionary and Information Technology, are now beginning to outperform other more defensive sectors, owing in large part to lower energy prices.

Cyclicals Take the Lead in 2015
 Cyclicals Take the Lead in 2015
Source: Bloomberg, as of 2/20/2015. Vanda Cyclicals - Defensives Index, measuring the relative performance of cyclical equities against defensive equities in the U.S.

Furthermore, bull markets tend to keep rising during periods of increasing market confidence and sentiment, accelerating earnings, stronger gross domestic product (GDP) growth, and improving fundamentals. We do see many of these market conditions in the U.S. economy today and are starting to see some of these positive developments abroad as well. Among the asset classes that we expect to do well this year are domestic large-cap stocks and developed international stocks; in other words, we think the equity bull market will continue. Nevertheless, we expect the elevated levels of volatility in many asset classes, including equities, to continue through 2015.

Darrell CronkAbout Darrell Cronk

Darrell L. Cronk is the president of Wells Fargo Investment Institute (WFII), an organization that provides world-class global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. Mr. Cronk also serves as chief investment officer for WBR, which 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 as chief investment officer, he leads global investment strategy including equity, fixed income, real assets, and alternative investments.

Mr. Cronk is frequently featured in the media including The Wall Street Journal, The New York Times, TheStreet, Dow Jones MarketWatch, Barron’s, the Associated Press, and Reuters, and makes regular appearances on Bloomberg, CNBC, and Fox Business News. He has authored numerous investment-related articles and regularly speaks at investment-industry conferences.

With more than 20 years of experience in financial services, Mr. Cronk most recently served as deputy chief investment officer for Wells Fargo Private Bank. He has held a variety of positions at Wells Fargo, including regional chief investment officer, senior director of investments, regional investment manager, senior investment manager, equity analyst, and senior financial consultant. He began his career as a senior credit analyst for Norwest Bank, a Wells Fargo predecessor.

Mr. Cronk earned a Bachelor of Science in Finance from Iowa State University, a Master in Finance from Boston University, and is a CFA® charterholder. He is based in New York City.

Tracie McMillionAbout Tracie McMillion

Tracie McMillion is the head of global asset allocation 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 her current role, Ms. McMillion leads the development of global investment strategy. She oversees the creation of asset allocation recommendations and writes economic and market commentary and analysis. Ms. McMillion has been quoted in The Wall Street Journal and Barrons, on CNBC, and in other financial media outlets.

Ms. McMillion has more than 18 years of experience in financial services. Prior to her current role, she served as an asset allocation strategist and a senior investment research analyst for Wells Fargo and predecessor firms. Earlier in her career, she served as lead portfolio manager for Evergreen Private Asset Management where she managed assets for high-net-worth clients and philanthropic organizations.

Tracie earned a Bachelor of Arts in Economics and a Master of Business Administration from the College of William and Mary in Virginia. She is a CFA® charterholder and member of the CFA North Carolina Society. Ms. McMillion is located in Winston-Salem, North Carolina.

*As of Sept. 30, 2014

Risk Factors

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.

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.

An index is unmanaged and not available for direct investment.

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 DAX German Stock Index represents 30 of the largest and most liquid German companies traded on the Frankfurt Stock Exchange.

Nikkei 225 Index is the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the U.S.

The CAC 40 Index (French stock market index) tracks the 40 largest French stocks based on market capitalization on the Paris Bourse (stock exchange).


Global Investment Strategy 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 Global Investment Strategy division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information 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.

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. First Clearing, LLC, Member SIPC, is a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.