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Investing before the bull becomes a bear

While the current market is on pace to set the record for the longest running bull market, a new Wells Fargo Investment Institute report says late-cycle investment opportunities remain.

With all the financial swings and fluctuations the market has seen in 2018, many investors may be wondering if the U.S. bull market is turning into a bear. A new Wells Fargo Investment Institute report, “Investing Late in a Bull Market,” calls for further stock market gains and continued economic recovery in a bull market that’s not over yet.

Tracie McMillion

Tracie McMillion, report author and head of global asset allocation strategy for Wells Fargo Investment Institute, said some of the factors supporting economic growth include the strong U.S. labor market, near-record levels of business optimism, and tax cuts that provide more money for workers and businesses to spend and invest.

McMillion said the transition between a bull and bear market is critical for investors since the best — and most difficult — time to prepare for a bear market is late in an economic cycle but before a bull market’s end. In fact, she said, the markets have historically continued to perform well in the latter stages of bull markets.

“Investors should look at the volatility as a potential opportunity and a normal part of the markets,” McMillion said. “If fully invested, volatility gives you a chance to rebalance positions at lower equity prices.”

The report flags sectors like consumer discretionary, such as electronics, apparel, and home improvement retailers, and industrials, such as manufacturing or defense equipment producers, among the investments that historically have fared well in the mid-to-late bull market periods. In addition to these sectors, Wells Fargo Investment Institute favors financials  — which have lagged in this particular cycle  — and health care.

“We believe it is still a good time to invest,” McMillion said. “We advise investors to look through the day-to-day market swings and focus on forecasts over the next 12 months, where we see markets higher.”

Over the past nine years, she added, the U.S. equity markets have reached new records. History suggests bull markets do not end suddenly, the report said. Instead, bear markets (defined as a downturn of 20 percent or more) follow several corrections of 10 percent or more.

“The bottom line is that we do not believe we are at the end of the business cycle, nor at the end of the bull market,” McMillion said. “But it’s time to make sure you’re comfortable with the amount of risk in your portfolio. We will see another bear market probably within the next few years.”

Read “Investing Late in a Bull Market: Essential Strategies for Today’s Investor” (PDF) and visit Wells Fargo Investment Institute for more investment education and insights.


Risks

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.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.

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.

Alternative investments carry specific investor qualifications, which can include high income and net-worth requirements as well as relatively high investment minimums. They are complex investment vehicles that generally have high costs and substantial risks. The high expenses often associated with these investments must be offset by trading profits and other income. They tend to be more volatile than other types of investments and present an increased risk of investment loss. There may also be a lack of transparency as to the underlying assets. Other risks may apply, as well, depending on the specific investment product.

Wells Fargo Investment Institute, Inc. (“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 WFII. Opinions represent WFII’s 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. WFII 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 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.

Contributors: Wayne Thompson
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