Wells Fargo strategists believe investors should brace for more market volatility as the selling season approaches, which will be exacerbated by the upcoming election cycle.
Historically, the period from late summer to early fall has been marked by significant declines in the stock market. Over the past seven years, the stock market has consistently experienced sell-offs ranging from 5% to 20%, and the investment bank expects this trend to continue into 2024.
Contributing to the uncertainty is the hotly contested US election, which is expected to lead to increased market volatility.
“An open, hotly contested election where the incumbent president is not seeking reelection, as is currently the case, only increases uncertainty,” the strategists said in the note.
“We believe the coming months will see bouts of volatility as stocks trend lower and struggle to make meaningful new highs.”
However, Wells Fargo notes that this period of volatility could present opportunities. The bank recommends that investors be prepared with a “shopping list” in case the market hits recent lows, pointing to sectors such as U.S. blue-chip stocks and specific sectors such as telecommunications, energy, financial services, industrials and raw materials within the S&P 500.
“We believe that small-cap US stocks may also be an attractive option to add exposure near market lows if the portfolio is under-allocated to the asset class,” the strategists added.
On the other hand, it may be wise to reduce positions in overexposed areas such as consumer discretionary, consumer staples, real estate, and utilities if the market reaches its recent highs.
Looking beyond 2024, Wells Fargo is optimistic about the longer-term outlook.
After the election, the firm expects the economy to shift from its current slowdown to sustained growth in 2025, driven by a recovery in earnings and higher stock prices. The report advises investors to keep an eye on 2025 as they make decisions in the coming months.
In simple terms, the bank concluded its statement by saying: “Watch 2025.”
The S&P 500 managed to post a modest gain in quiet trading on Monday, while falling under pressure from a slide in technology stocks as investors weighed the possibility of a larger-than-expected interest rate cut by the U.S. Federal Reserve later this week.
The S&P 500 technology index, which has been the strongest of the 11 major S&P sectors this year, fell 0.95%, making it the biggest loser of the session.
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