Investing.com — Wells Fargo strategists believe investors should brace for increased market volatility as the selling season approaches, amplified by the upcoming election cycle.
Historically, the period from late summer to early autumn has been characterised by significant stock market declines. Over the past seven years, the market has consistently faced sell-offs ranging from 5% to 20%, and the investment bank predicts that this trend is likely to continue in 2024.
Adding to the uncertainty is the closely contested US election, which is expected to increase market volatility.
“An open and highly contested election in which the incumbent does not seek re-election, as is currently the case, only serves to increase uncertainty,” the strategists said in the note.
“Our view is that the coming months are likely to see bouts of volatility as stocks move sideways and struggle to reach meaningful new highs.”
Wells Fargo, however, suggests that this period of volatility could present opportunities. The firm recommends that investors be prepared with a “shopping list” if the market hits recent lows, pointing to sectors such as U.S. large-cap stocks and specific segments such as communication services, energy, financials, industrials and materials within the S&P 500.
“We believe US small-cap stocks could 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, trimming positions in overexposed areas such as consumer discretionary, consumer staples, real estate and utilities may be a good idea if the market hits recent highs.
Looking ahead to 2024, Wells Fargo is optimistic about the long-term outlook.
Following the election, the firm expects the economy to move from its current slowdown to sustained growth in 2025, driven by a recovery in earnings and a resurgence in stock prices. The report advises investors to keep an eye on 2025 as they make decisions in the coming months.
“In short, as a campaign slogan: 'Don't lose sight of the 25th,'” the bank concluded.
The S&P 500 managed a modest gain in quiet trading on Monday, while the index fell, pressured by a drop in technology stocks. Investors weighed the chances of a larger-than-expected rate cut by the U.S. Federal Reserve later this week.
The S&P technology index, which has been the strongest among the 11 major S&P sectors this year, fell 0.95%, making it the biggest loser of the session.
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