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Global Investment Strategy

June 29, 2015 (Weekly Update)

Paul Christopher, CFA®, Head of International Strategy and Co-Head of Global Real Assets

Weekly market insights from the Global Investment Strategy team

  • Fears persist that Federal Reserve (Fed) monetary policy stimulus is producing financial market excesses.
  • Although monetary stimulus has been large, important precursor characteristics of the prior decade’s crises are missing.

What it may mean for investors

  • The combination of an improving global economic recovery, low global inflation and interest rates, and various other issues are moderating market optimism. Therefore, we currently favor equity over fixed-income markets and U.S. over international markets.

Keep Fears of a "Bubble" in Check

This year marks seven years since the 2008 global financial crisis, which came roughly seven years after the end of the technology stock boom. A common concern among investors is that the recent economic and financial recoveries are due to extremely low interest rates and other Fed policies that encourage the same speculative behavior that preceded the 2001 and 2008 crises. We think that caution has a place in an investment plan, but that investment conditions today differ from those in 2001 and 2007.

What's in a "bubble"?

In a financial context, the term "bubble" refers to markets in which sustained price gains outpace the improvement of supply-demand, earnings potential, and other fundamental factors. Often, a long respite from economic stress lulls people into a false sense of security and encourages the reckless behavior that inflates bubbles. For example, by the middle of the last decade, investors had seen 20 years of steady economic growth and low inflation, and had watched the world economy shrug off the effects of the technology stock boom with the relatively shallow 2001 economic recession.

Another characteristic of a bubble is easy access to credit, whether the funds come from international investors or from monetary policymakers. Easy and ample financing helps household and business behavior morph from a cautious search for value into an unthinking assumption that future income and profit will keep pace with accelerating borrowing.

Are financial markets at risk of a bubble today?

Far from recklessness, today a sense of caution still seems to prevail across the financial markets. The early, unsteady years of the current U.S. economic recovery failed to brighten consumer confidence, and even the sentiment rebound since 2013 remains well below the peaks of 2000 and 2007. Another missing bubble precursor is easy access to credit. U.S. policymakers have adopted aggressive and unusual monetary stimulus policies since 2008. The monetary stimulus has placed large sums of money at banks, but lending growth has been slow and does not suggest speculative activity.

The charts below illustrate that U.S. households and businesses have not exploited the available liquidity. Nonfinancial corporate business borrowing per dollar of profit and household borrowing per dollar of income are flat and below the aggressive borrowing levels that characterized the boom periods before the 2008 crisis. From the inverse perspective, these charts suggest that the current economic recovery is not an illusion of borrowing. In fact, profit and income are rising faster than borrowing.

Household and Nonprofit Net New Borrowing
(As percentage of Income)
 Household and Nonprofit Net New Borrowing As percentage of Income)

Nonfinancial Business Net New Borrowing
(As percentage of Profit)
 Nonfinancial Business Net New Borrowing (As percentage of Profit)
Four-quarter moving averages. Income and profit are before taxes and profit includes inventory valuation adjustment. Business debt includes commercial paper, municipal securities and corporate bonds. Household debt includes home and commercial mortgages, consumer credit, loans and advances. Sources: Federal Reserve (Financial Accounts of the United States), and Wells Fargo Investment Institute.

There is also concern about margin debt, as the S&P 500 hovers near an all-time high. Margin debt rises with equity prices and falls when they fall but does not seem excessive. As of the end of May, margin debt is 16 percent higher than a year ago, but this pace is several times slower than the 78 percent annual pace in March 2000 and the 68 percent rate of July 2007, ahead of the past two crises.

Don’t let bubble fears obscure opportunities

Reckless borrowing seems absent today, and may remain a distant prospect if the Fed raises interest rates and makes borrowing more expensive. For now, the key conditions of recent bubbles appear to be missing—confidence remains modest, the U.S. and the broader global economy are still improving, and borrowing is not extreme.

Our recently published mid-year outlook report discussed the problem of recency bias, the tendency to misjudge the future by overemphasizing the past.1 Looking back to 2008 and waiting for the next shoe to drop can give an investor cold feet and hide opportunities. In the near term, we believe in improving global economic and earnings growth coupled with low inflation. Geopolitical issues in the Middle East and Eastern Europe matter but help moderate optimism, and seem only modest headwinds for global growth. In this environment, we broadly favor equity over fixed-income markets and U.S. over international markets.

1 For the full report, please see 2015 Midyear Outlook: Opportunities in an Improving Global Economy, June 2015, at

Paul ChristopherAbout Paul Christopher

Paul Christopher is the head of international strategy and 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. Christopher focuses on the international economic outlook and offers investment advice on currencies and commodities. He is frequently quoted in the national media, including The Wall Street Journal, The New York Times, Forbes, Time, Investor's Business Daily, USA Today, Bloomberg News, ABC News, NBC News, and CNBC.

Prior to joining Wells Fargo, he developed economic strategies to trade in global financial and commodity futures markets for Eclipse Capital Management. In previous positions, Mr. Christopher supplied international economic perspectives for Wells Fargo predecessor A.G. Edwards, and advised institutional clients of Istanbul-based Global Securities on the oil-based economies of the Caucasus and Central Asia. He has consulted with the governments of Hong Kong, Egypt, Russia, Kazakhstan, and the Kyrgyz Republic on monetary policy issues.

*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.

Investments in fixed-income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.


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.

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