Wells Fargo: Bull Market to Extend Through 2018, but End may not Be Far

International markets to lead growth, active management to make a resurgence.

In its 2018 outlook report, Wells Fargo Investment Institute said that although the current bull market is maturing, it expects it to continue through 2018, with the international markets leading the way.

“As we look at 2018, we see the US bull market aging, but it doesn’t end in 2018,” said Sean Lynch, co-head of global equity strategy at a presentation of the report. However, he added, “though we don’t think returns will match what we’ve seen over the past 8 ½ years.”

Lynch said the firm expects the S&P 500 to hit 2,700, and for earnings and revenues to continue to grow at a rate of 12% and 6%, respectively.

“The global expansion is coordinated, synchronized some would say, but the US expansion is more mature,” said Darrel Cronk, CIO of Wells Fargo Wealth and Investment Management, at the presentation. “International markets continue to pose better earnings growth prospects, cheaper valuations, and are earlier in the recovery cycle than the US.”

The report, “Moving Ahead in an Aging Recovery,” also says that investors should be more selective in asset selection.

“We are at a point in the cycle when it’s particularly important to seek ways to reduce unnecessary portfolio risks, which is best accomplished through a diverse portfolio,” said Cronk. “We believe the primary portfolio challenge for 2018 will be to assess risk and reward more diligently as investors look for late-cycle opportunities.”

In its report, Wells Fargo Investment Institute also said that active management is expected to have a big resurgence in 2018, and that investors should incorporate active management strategies into portfolios.

“People don’t really realize that that the active-passive debate is a cyclical debate,” said Adam Tabak, head of global alternative investments. He said that early in an economic cycle, passive investing will do well, but that active managers are better positioned during the later stages of the economic cycle, and into a recession.

“We think we’ve firmly entered into that phase where we’re in the later stage,” said Tabak. “It is going to get harder to pick winners and losers, and a good active management, especially in the hedge fund side, should be very well positioned … the best that we’ve seen them positioned in the last 10 years.”

The report also outlined five actions it thinks investors should consider going into 2018:

  1. Evaluate your current portfolio allocation versus historical crises events. Equity allocations could have moved beyond investors’ target allocations, in which case now may be a good time to rebalance.
  2. Seek alpha through active management, particularly in equity hedge and relative value.
  3. Stay flexible when assets are mispriced. The firm said there are some asset classes where the risk outweighs the opportunity, such as high-yield bonds and small-cap equities.
  4. Hold an appropriate level of cash, six to 18 months’ worth.
  5. Keep your eyes on the goal. A long-term focus and a diversified portfolio are key to taking advantage of a continued bull market, while mitigating any losses from a potential bear market.

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