Wallet Wednesday: Contained Exuberance

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MYRTLE BEACH, SC (WBTW) – Baxter Hahn with Wells Fargo Advisors joined News13 Now at 9 a.m. to talk about the current stock market and investing. After a rising stock market since the November 2016 election, Hahn talked about the need to remain disciplined in investing. Watch the video for brief details. The following from the Wells Fargo Investment Institute gives a more in-depth look:

Weekly market insights from the Global Investment Strategy team

  • January was a very good month for financial markets.
  • Going forward, we expect markets to fluctuate as investors assess the potential positives and potential negatives of policy actions.

What it may mean for investors

  • An oscillating market could offer opportunities for investors to buy when fear dominates and sell when greed dominates.

Download the report (PDF)

Global markets are off to a great start this year. Nearly all markets moved higher in January. In contrast to late 2016, international-market returns exceeded domestic returns as the U.S. dollar depreciated. Going forward, we do not expect markets to continue to increase this rapidly. Last week, U.S. equity markets slid about one percent before regaining their footing on dovish statements from the Federal Reserve (Fed). We believe that stocks and other asset classes will fluctuate throughout the year as headline risk moderates exuberance. So far this year, it appears investors have judged the weight of potential positives for the markets to be greater than the weight of potential negatives.

Chart 1. Investors Now See Potentially Positive Factors Outweighing Potentially Negative Factors

Potential Positives

Tax Policy. Since the U.S. election, investors largely have focused on the positive aspects of the new administration’s plans, including its plans to reduce individual and corporate taxes. Many investors, including us, expect a reduction in corporate-tax rates to benefit business profits. However, our research shows that many companies are already paying an effective tax rate that is much lower than the current top corporate-tax rate. Financial companies, which tend to be domestically focused, are among the companies paying the highest effective tax rates and could benefit from a lower overall corporate tax rate. To keep their effective tax rates low, many U.S.-based multinational companies keep their international profits invested abroad. A reduction in the cost to “repatriate” assets should benefit companies in such sectors as Information Technology and Health Care.

Regulatory Policy. Deregulation could benefit corporate profits by reducing the cost of compliance and by encouraging a more rapid product-approval process. Highly-regulated sectors include the Financials, Energy, and Health Care sectors. While Financials and Health Care could benefit from a reduction in regulation, Energy may not. That’s because a reduction in regulations in the Energy sector could bring more supply to the market, reducing prices.

Fiscal Policy. Expectations are high that materials and industrial companies could benefit from increased federal spending on infrastructure. Fiscal spending could face opposition from lawmakers in Congress who are concerned about the cost of an increase in U.S. debt levels, particularly if tax rates are reduced.

Potential Negatives

Trade Policy. Attempts to support U.S. manufacturers and U.S. workers by limiting imports through either tariffs or a border tax would likely increase costs of (and reduce the profits from) imported goods. More broadly, policies that restrict imports should generate more domestic production and demand for domestic resources, which could raise inflation and borrowing costs—and fuel dollar appreciation, to the detriment of international returns in dollar terms.

Fed Policy. Last week, the Fed kept its outlook largely unchanged. Should the U.S. and global economy continue to improve, inflation continue to rise, and the employment market remain firm, as we expect, the Fed’s stance likely will shift to a more hawkish tone. We believe that the Fed will raise interest rates two times this year, but commentary from the Fed will continue to present potential headline risk to markets.

Social Unrest. Concern persists that controversial policies and geopolitical events could impede the progress of U.S. and global economic recoveries.

Implications for Investors

Global markets should remain vulnerable to positive and negative surprises as policy in Washington and election results in Europe take shape. Still, underlying economic conditions are improving globally, and market valuations generally appear reasonable. These factors should help to support recent market gains. Economic improvement abroad reinforces our advice to hold international assets as part of a broadly-diversified portfolio. We currently suggest holding an evenweight (neutral) position in international asset classes relative to long-term target allocations.

However, the potential for disruption is ever-present. The possibility of a near-term pullback in equity and commodity markets has us more conservatively positioned in most portfolios than in recent quarters. For this reason, we believe that most investors should maintain exposure to high-quality bonds as part of a diversified portfolio. We currently recommend an overweight position in intermediate U.S. investment-grade fixed income. We expect markets to fluctuate throughout 2017, ending the year about where they are today. An oscillating market could offer opportunities for investors to buy equities when fear dominates and sell when greed dominates. We will be watching for these conditions and will offer tactical guidance along the way.

Investment and Insurance Products:

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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.

Investing in commodities is not suitable for all investors.  Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities.  Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.  Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

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.  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.

Disclaimers

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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