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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.

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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

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