Markets

Dedicated to helping our clients achieve their financial goals.

Wells Fargo Advisors Market Commentary

A weekly commentary on the market from Wells Fargo Advisors.

May 23, 2018

Scott Wren, Senior Global Equity Strategist

Bandwagon Effect

  • After the stock market set a series of new record highs last year and into early 2018, the correction has, for now, taken out much of its momentum.
  • However, we do think that before this bull market is over, investors will be jumping on the bandwagon and helping to push stocks higher.

Download the report (PDF)

Throughout virtually the entire equity rally off the March 2009 lows, individual investors as a group have been cautious and sitting on cash. Many were burned, at least on paper, in the bear market last decade when the housing bubble burst. And many, quite simply, are still not back to “fully invested” status. They have continued to sit on cash that basically yields nothing, or awfully close to it. That is generally not a good idea when building retirement assets is a major goal. We believe one needs to be focused on taking advantage of meaningful pullbacks in the market by stepping in with sidelined cash, not heading for the exits in the midst of a panic. As Baron Rothschild, 18th century British nobleman and part of the Rothschild banking family, once stated, “The time to buy is when there is blood in the streets.”

But now, more than nine years later, we are well past that stage. The cycle has moved ahead, the economy is growing at a good pace, unemployment is low, and the stock market has made new all-time record highs (just not lately). What has been missing is something that typically signals that the end of the bull market is on the horizon. Let’s call it the “bandwagon effect.”

In this strategist’s mind, there is a good chance that before this economic expansion and equity cycle is finally over, the bandwagon effect will be in full force. In other words, before the next bear market, demand for stocks will push the major indices higher simply because enough investors want to “get on the bandwagon” and buy stocks, just like “everybody” else, so they do not miss the next leg up in the major indices. After all, they hear their friends talking about the stocks they are buying. Their coworkers are talking about the stocks they are buying. The people standing in line with them at the local big box home improvement superstore are talking about the stocks they are buying. How can an investor just sit there and not buy stocks given all that enthusiasm?

But it seems we are far away from that mentality right now. It is true that individual investors have shown more interest in equities over the last year based on numerous surveys. Some new money is trickling in. Could this be the start of the last leg of the bull market? Probably not. The bandwagon effect, historically, plays out over the course of a year or two. In addition, we are not ready to call an end to this economic cycle or the bull market. We think the probability of a recession into mid-2019 is low. Of course, if the Federal Reserve (Fed) were to hint that the pace of interest rate hikes is likely to increase from the current telegraphed pace (two more hikes this year, three hikes next year), then that may bring the cycle’s end a little closer. Fed monetary policy is typically what drives the ebb-and-flow of the economy.

Some market chasing in the second half of last year and into early 2018 helped stocks. But then the correction came and momentum slowed. In this cycle, in our opinion, it is a little early for a sustained rally based on the bandwagon effect. We continue to see stocks modestly higher than current levels at year end.

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. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

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.

HOW CAN WE HELP YOU WITH YOUR FINANCIAL GOALS?