Institute Alert

What’s moving markets

• President Trump on April 9 implemented a 90-day suspension of the recently announced reciprocal tariffs for most countries, but he increased the import tariff to 125% on Chinese goods effective immediately.
• In response, the European Union will delay implementing counter tariffs against the U.S. for 90 days, suspending tariffs on $21 billion of U.S. goods.
• After a historically strong rally yesterday, equity futures indicate a lower open as investors take some profits.

Our perspective

• Markets got some much needed good news in the delay of tariff implementation, but it means we could repeat the entire process in 90 days, depending on how many deals are negotiated and completed.
• Economic data are cooling and consumer and business confidence have been badly dented; first quarter (Q1) earnings reporting season should give some insight on the path for future corporate capital expenditures and hiring.
• We believe the S&P 500 Index (generic first futures contract) is about to change trend (from higher to lower) as the 50-day moving average (5797) is expected to soon cross below the 200-day moving average (5787). The S&P 500 Index may possibly find support next at the April 2024 and October 2023 lows (5004, 4138); resistance lies above at the 200-day moving average (5787) and the 50-day moving average (5797).

Implications for investors

• We favor not chasing yesterday’s rally, as history suggests that the sharpest rallies have happened early in the equity market bottoming process. Instead, we believe long-term investors should incrementally add exposure on down days to high-quality U.S. equity asset classes and sectors and stay selective in fixed income (see below).
• If the bounce carries further, investors may want to consider trimming lower quality areas like U.S. small-caps or emerging-market equities.

For investors who have cash and are considering investing, even amid uncertainty, we would stick with quality. Our favorable rating on Commodities may help hedge against potential inflation effects. Our equity guidance prioritizes quality, while our fixed income guidance emphasizes selectivity. International economies depend more on trade than does the U.S. economy, so we favor U.S. equities. Among the U.S. markets, we favor Large- and Mid-Cap U.S. Equities and select sectors (Information Technology, Communication Services, Financials, and Energy). We also favor investment-grade fixed income and would focus on corporate bonds and essential-service municipal securities. In our view, the middle range (3-7 years) offers the best value at this time.

For investors who have a long-term focus and want to remain cautious here, some buffer can make sense. Money market rates are higher than they were the last time major uncertainty landed on financial markets, at the beginning of the COVID lockdowns. So, for now, rates above 3% are one option. As prices settle, we believe legging back into financial markets, especially if underweight to strategic targets, should remain a priority.  

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. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and provide a level of liquidity and price stability generally not available to these investments. Some examples of cash alternatives include: Bank certificates of deposit; bank money market accounts; bankers’ acceptances, federal agency short-term securities, money market mutual funds, Treasury bills, ultra-short bond mutual funds or exchange-traded funds and variable rate demand notes. Each type of cash alternatives has advantages and disadvantages which should be discussed with your financial advisor before investing.

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.

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