Wells Fargo Staying Neutral in Equities

Wells Fargo’s investment advisory arm is staying neutral in equities “for now” and has a base case that the US and China will reach a trade deal “at some point,” even as increased rhetoric between the countries prompted slide in markets and elevated volatility this week.

Scott Wren, senior global equity strategist with the Wells Fargo Investment Institute, said that while the magnitude of the volatility is unusual, it’s not uncommon for the stock market to claw back “one-third of the gain on very little news” after a big rally.

The Standard & Poor’s 500 hit record highs earlier in the summer, and were up nearly 29% in the rally since the low hit on Dec. 24.

“Once the upside momentum sputters, traders start to take a little money off the table and those weaker hands who got in near the highs just don’t have the stamina to stand in and watch their losses mount,” Wren said in a note on Wednesday.

Markets were weaker on Wednesday and the CBOE Volatility index, known as the Vix, was up 2.1% in afternoon trading.

Wells Fargo said they’re still looking for “modest economic growth with only modest inflation,” an environment that tends to be good for equities. Economists from the bank raised their outlook for US output to 2.3% this year from 2.1% previously seen after a better-than-expected first half.

“We realize there is a risk that the current trade skirmish has the potential to deteriorate into something worse, but that is not our base case as we look for a US-China trade deal at some point in the future,” Wren said.

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