Global Equity Strategy Special Report

Weekly discussion of recent equity market action with equity sector highlights and what it may mean for investors.

January 25, 2017

Stuart Freeman, CFA, Co-Head of Global Equity Strategy
Sean Lynch, CFA, Co-Head of Global Equity Strategy
Scott Wren, Senior Global Equity Strategist

Dow 20,000: What Investors Need to Know

  • We believe that record highs in the U.S. equity markets, and the Dow Jones Industrial Average (Dow) crossing 20,000 today, are largely based on improving fundamentals in the economy and with earnings.

What it may mean for investors

  • We recommend that investors keep U.S. Large Cap Equity exposure at targeted levels. We continue to favor the Consumer Discretionary, Industrials, Health Care and Financials sectors.

Crossing Dow 20,000 can be a psychological, emotional, and technical development for investors; however, there is nothing magical about this level. In the very near term, some short-term traders may make trades near and around new market levels (or index levels that end in zeros.) Yet, investors should keep in mind that underlying fundamentals and valuations offer the backdrop for index levels. We would not trade on the Dow 20,000 number itself. We also have no plans to adjust our equity weightings at this time.

It is always important to periodically review and rebalance your portfolio exposure, and the Dow 20,000 milestone marks a good time for this review. Wells Fargo Investment Institute moved to evenweight (neutral) on U.S. Large Cap Equities at the start of 2017. We are not negative on equities. Yet, for investors whose large-cap exposure has run ahead of its targeted weight, we would recommend paring it back to the targeted level.

The fact that the Dow has hit a 20,000 level does reflect some renewed optimism on the part of U.S. investors. We believe that the domestic economy and earnings environment were improving prior to the election, but the new administration certainly has helped some sectors that had been lagging—such as Financials. The prospect of less regulation and a steeper yield curve has helped the Financials sector, and new policies could favorably impact additional segments of the economy over time.

Investment Implications

  • Investor, business and consumer optimism is rising as we hit new equity-market highs. Investors can feel good about the Dow hitting 20,000. However, the best news is that fundamentals are improving and are unlikely to leave that trajectory in the near term. While investors were concerned early last year that an earnings recession would persist, earnings are likely to have their second quarter of growth (likely 4-6 percent) for the fourth quarter of 2016, and we expect them to trend upward in 2017.
  • We remain evenweight on U.S. Large Cap Equities because valuation has moved slightly ahead of the historical median and because yields on bonds have started to become more competitive. Equity valuations can be pushed to higher levels as investors become more optimistic. Yet, we believe that markets will be driven by earnings this year, rather than through valuation expanding materially from these levels.
  • We believe that investors should remain invested at targeted levels of large-cap equity exposure and avoid getting overextended in equities as the major U.S. indexes cross these milestone levels. For investors with larger amounts of cash, we recommend looking for pullbacks before putting additional money to work in equities. Dow 20,000 is a number, just like Dow 10,000 when it was achieved in March of 1999.

Risk Factors

All investing involves risks including the possible loss of principal. 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.

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 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.

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 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.

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