Chart of the Week

Since the Iran War began in late February, equity market performance has shifted away from the cyclical, broad based leadership that characterized the start of the year. Sector and regional returns suggest that the conflict did not result in a flight to quality assets such as gold, U.S. Treasuries or defensive equity sectors but instead accelerated rotation within equities, resulting in higher dispersion across geographies, asset classes, and sectors.

The chart above shows this increase in dispersion at the equity sector level (represented by S&P 500 index sectors) since the start of the Iran war. For example, Energy has been a significant outperformer while defensive sectors such as Utilities, Consumer Staples, and Health Care have, surprisingly, underperformed.

We prefer diversification and rebalancing for portfolios with long-term risk and return objectives. We see the current market volatility and rotation as an opportunity to consider exposure to U.S. Large Cap Equities and to rebalance from the Energy sector toward Financials. We continue to favor Industrials and Utilities and believe the Information Technology sector is attractive, with forward price earnings multiples selling near historical averages.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.

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.

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. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

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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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