Peter Nulty

The running of the bulls’ market (excerpt)

On the Trading DeskSM3-20-13
By Peter Nulty

What’s driving this bull market? Should we be concerned? How far might this bull run? John Manley, CFA and chief equity strategist with Wells Fargo Funds Management, LLC, offers insight in this excerpt of On the Trading DeskSM from Friday, March 15, 2013.

Listen to the full interview

So help us understand what’s driving this record rise in trading over these last three or four months.
I think the shift at the margin—what’s changed—is that it’s gone from being sort of poisonous to think about stocks for individuals to actually being rather attractive. People and institutions have both tried whenever possible to avoid the stock market despite the Fed’s encouragement. And now it’s like a little bit of an earthquake. It’s almost tectonic. Four years of people being out, and it’s suddenly being replaced by four months of people trying to get in.

Wow! Well, that does also seem to raise some investor concerns from what I’m hearing. First, some people are worried that too much has happened too soon. How do you feel about that?
Well, I wouldn’t say it’s too soon. I think there was this concern that even though risk-free rates have been driven close to zero, that other risks existed in the stock market; this perception of risk is only one side of it, just the downside of risk. But I think what’s happening over the last three or four months, and I think it started in maybe November, maybe January, but essentially individuals looked at it and said there’s a risk in being out as much as there’s a risk of being in.  

Another investor concern is that a correction is imminent. How do you feel on that point?
You can’t say there is never any risk in the market. Of course, there is a chance of a correction, but from what level and how much? I don’t think it has to happen right away. The fundamentals are good. The valuations aren’t bad, and there is still a lot of money that’s been out for a long time.

Now, there are also investors who are thinking it’s too late to get in. Do you think it’s too late?
No I don’t. You really have to pay attention to the direction of the market. I think there’s a lot of money, as I said, trying to get to work in here. We had a very strong January. That’s usually a positive sign for the next 11 months of the year.

John, when the market is going up like this, do portfolio managers have to be keener than ever in selecting the stocks that they invest in?
I think so. I think what’s [needed] is some sense of context. What are we missing? What’s already happened that hasn’t been looked at? What factors are at work that have not been discounted yet? I think that’s probably the best way for a portfolio manager to look at stocks.

John, what sectors do you think are benefiting most from this bull market?
Well, I think that there are three. Number one is health care. That’s sort of my noncyclical area. I think that a lot of us are going to be paying more taxes for other people’s and our own health care going forward. I think that helps the big pharmaceutical and device companies. I don’t think that’s been discounted yet. Number two, I like technology. Now that’s big cap in my mind. I like technology companies selling technology to other companies. I don’t think the tech upgrade cycle is over. The cycle is still miserable for the economy, but it has to do with these technological upgrades and more efficiencies. Third, I like energy. I think it’s too soon to buy commodity stock, but I think the Fed is in a position where they will be accommodative for a while. I think one way to get into that is to buy high-quality multinational oil companies, integrated oil companies. You get exposure, but you don’t get as much risk as one might with some of the smaller companies.

Now, let’s talk about how much farther this bull might run and what moves in one direction or the other it might make first. Where does the market go from here: up, down, a bit of both? What’s reasonable?
Obviously, I think it’s going to be a bit of both, but I think there is more risk for the upside. I think the surprise would still be if it moved to the upside. We have a year-end target of 1,600 for the S&P 500, which doesn’t sound like much now but was when we made it. What I’d emphasize is a year or two out—when we get to the end of 2014—we have a 2,000 target on the S&P 500. That’s a very aggressive target, but in reality the underlying assumptions are not aggressive at all. All we need is 16 times earnings that will grow 5, 6, 7% per year for the next couple years, and you can get to that 2,000 target.

John, we welcome a parting thought for investors.
Well, remember, you have to be patient, and then you have to move. There are all sorts of risks out there, but the risk of being out is just as real as the risk of being in, in my opinion.

That is all the time we have. Thanks for joining us again.
Thank you, Peter.

The views expressed are as of 3-20-13 and are those of Peter Nulty; Chief Equity Strategist John Manley, CFA; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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