Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

June 13, 2018

Scott Wren, Senior Global Equity Strategist

Head Fake

  • Investor fears over a wide ranging number of issues resulted in our recommended sector weightings suffering in terms of performance versus the S&P 500 Index.
  • However, over the last month, things appear to be back on track with the bulk of our most favored sectors outperforming.

Download the report (PDF)

A funny thing happened on the way to mid-year 2018: Stock volatility skyrocketed versus last year and the results were a quick 10% fall in the S&P 500 and meaningful churning in terms of sector performance. From early February through the end of April or so, investors were concerned the current cycle might come to an end as fears of a trade war, higher inflation, wage pressure hurting corporate margins, a global economic slowdown, and the Federal Reserve (Fed) picking up the pace and magnitude of rate hikes all formed what could be called a “perfect storm” of concerns.

But the question was, is, and will likely continue to be whether any of these concerns will become reality any time soon. But isn’t that always the case? Trying to handicap certain outcomes in the stock market, most of the time, can be extremely difficult. Human emotion sometimes takes over for extended periods of time as the market and the underlying fundamentals detach from each other. That is how the old quote stating “the stock market has called nine of the last five recessions” was born. We “advanced” mammals don’t always act all that advanced when our money is on the line. Fear or greed can overrule common sense and conviction more times than most of us would like to admit. Having said that, are all of the concerns listed above unlikely to occur? Is the probability that any of them become reality zero? Absolutely not, at least in this strategist’s opinion. But investing has always been a matter of assessing the probabilities and making decisions based on that analysis. That is what the Equity Strategy group had to fall back on earlier in the year when volatility picked up as fears over any number of things happening ramped up.

Our overall sector weighting recommendations worked well from the beginning of 2017 through the end of January of this year. Then things went haywire. We had been leaning toward the more cyclical sectors of the market for some time as we had most favorable recommendations on the Industrials, Consumer Discretionary, and Financials sectors anticipating better capital expenditures and consumer spending as the cycle progressed. We have also been favoring the Health Care sector. We did not want to see investors leaning toward the more defensive sectors like Utilities and Consumer Staples. But if you look at sector performance for February through April of this year, as the S&P 500 posted a negative return, a number of our favored sectors underperformed while those least-favored sectors beat the return of the index over that time frame. Was this a change in trend? Was it time to make adjustments to our sector weightings? Was the cycle coming to an end?

Not if you look at sector performance over the course of the last month. Things appear to be getting back on track. The S&P 500 has rallied and stands just a touch over 3% below the record high set in late January. In terms of sectors, three of our four most favored (Consumer Discretionary, Health Care, and Industrials) have outperformed the index while two of our three least favored (Energy and Utilities) have underperformed the index. Sector performance is turning back toward those sectors that should benefit from the macro outlook we envision. In other words, in our opinion, the February through April market action was nothing more than a head fake.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve.

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Concentration within certain sectors or industries within the economy may present more risks than if a portfolio were broadly diversified over numerous sectors of the economy.

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 Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. 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.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. 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 and 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.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.