Market Commentary

Weekly commentary on recent stock market action, with a particular focus on technical analysis.

August 17, 2016

Scott L. Wren, Senior Global Equity Strategist

The Trends Are in Place—For Now

  • The stock market is making record highs as investors find the domestic economic recovery more dependable and recessionary probabilities low.

What it may mean for investors

  • We look for some downside volatility in coming months but believe the longer-term upward trend in stocks will remain in place over the balance of this year and into 2017.

Way back in a previous life spent grinding it out on the currency trading desk on a daily basis, this strategist remembers one of our FX (foreign exchange) group’s favorite quotes: “The trend is your friend.” While we were not sure who originally made that statement, we were completely convinced that no truer words could be uttered, or understood, by any serious market participant. Stick with the trend and life can be very good. But trying to fight the trend and go the other way, especially on a repeated basis, has sent many a trader to the poor house, or at least into another line of business. Any trader worth his or her salt has made this mistake a time or two, but the survivors quickly learned their lesson.

The stock market isn’t any different than the currency market or, really, any other traded commodity or instrument; the trend can indeed be your friend. And clearly, the stock market’s trend since the March 2009 lows has been up. Even those only casually paying attention to the equity markets, and certainly regular readers of this piece, likely know that most of the major indices, especially the widely watched Dow Jones Industrial Average, have notched all-time record highs in recent weeks and days. The trend in stocks over the last seven years didn’t mean we were always on a one-way street straight up. There were twists and turns along the way as is always the case.

This year has been a perfect example. On the way to setting record highs in the S&P 500 in 2016, investors have had to sit through two meaningful but fortunately short-lived pullbacks. However, numerous market pundits, members of the financial media, and investors believed that these downside bouts of volatility, while they were occurring, spelled the end of the upward trend for equities. Unfortunately, bad news does sell. Many were convinced the uptrend was over.

And someday it will be. Nearly all trends do eventually come to an end. It is a fact of life that is difficult to avoid. There are also other related strong trends in place that have aided the stock market in recent years. The trend has been for the Federal Reserve to keep monetary policy very easy over the last eight years. The trend in bond yields has been lower. The inflation trend has been modest. The trend in equity valuations, on a price-to-earnings (P/E) ratio basis, has been higher. In the financial markets, we need to be on our toes. We don’t want to be lulled into thinking these trends are going to be in place forever.

We need to continue to look ahead and seek out indications that some or all of these trends might be coming to an end. We continue to analyze and make projections on a number of market and economic leading indicators to try and determine when these trends are going to take a meaningful turn and negatively affect the stock market. The trends are in place, for now, but we remain ever vigilant in our attempt to identify changes in the trend well in advance of any meaningful equity turn. Stay tuned.

Risk Factors

All investing involves risk including the possible loss of principal. There is no assurance any investment strategy will be successful or will meet its investment objectives.

Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. Wells Fargo Investment Institute 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 Wells Fargo Investment Institute. 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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