Investing Late in a Bull Market

Essential Strategies for Today’s Investor

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A bull market for the record books

This is currently the second-longest S&P 500® Index bull market on record, with the third-highest price return (295%). Scroll down to see how it compares to previous bull markets.

In this report, we identify signals that might indicate whether the bull market is nearing its end and offer strategies for the latter stages of a bull market.

NOTE: A larger circle represents a bull market with a higher return.

Sources: Bloomberg, FactSet, and Wells Fargo Investment Institute, March 31, 2018. For illustrative purposes only.

The market is represented by the S&P 500 Index. Index returns reflect general market results and do not reflect actual portfolio returns or the experience of any investor, nor do they reflect the impact of any fees, expenses, or taxes applicable to an actual investment. The S&P 500 Index is a market-capitalization-weighted index that is generally considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Average vs. Current Bull Market Length Average vs. Current Bull Market Return

Capitalizing on the long-running bull market

This video highlights what investors should know as we enter
the bull market’s later stages.

View transcript

Four Late-Cycle Signs to Monitor

Signals that point to potential risk in the economy and markets can include widening credit spreads, investor complacency, rising interest rates, and potential asset bubbles.

Although we have seen signs of investor complacency in 2017 and early 2018, other factors are not foretelling that a recession is likely in the near term, supporting our view that the bull market still has some room to run.

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1. Widening credit spreads

Credit spreads measure the amount of increased return an investor requires for a given company’s credit risk. As the economy enters the latter stages of the cycle, business risk increases. Investors then demand more return, resulting in wider (higher) credit spreads.

What we’re seeing

There currently are few signs that credit spreads are widening.

As shown here, neither high-yield nor investment-grade credit spreads on taxable bonds have shown signs that investors are asking for higher returns to compensate for increased risk.


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U.S. credit spreads have yet to significantly widen

Sources: Bloomberg and Wells Fargo Investment Institute. For illustrative purposes only. Investment grade represented by Bloomberg Barclays U.S. Aggregate Bond Index, which is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market. High yield is represented by Bloomberg Barclays U.S. Corporate High Yield Bond Index , which measures the USD-denominated, high yield, fixed-rate corporate bond market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Option-adjusted spread is the difference in yield over equivalent-duration Treasuries. Shaded area indicates a recession as designated by the National Bureau of Economic Research. Data as of March 31, 2018.

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2. Investor complacency

Late in a long bull-market run, investors may remain calm even during bouts of volatility. Many have become accustomed to a stock market that continues to climb higher.

What we’re seeing

Earlier this year, when the S&P 500® Index experienced its first correction in a few years, many investors appeared to be taken by surprise.

We believe that investors should be on guard for further periods of volatility and maintain a diversified portfolio in line with their longer-term investment plan.


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3. Rising interest rates

As the economy strengthens, the Federal Reserve (Fed) raises rates to prevent the economy from overheating and inflation from accelerating.

What we’re seeing

Currently, short-term interest rates are increasing but are not considered restrictive.

A key signal of an impending recession is when the yield curve inverts, such as when the 2-year U.S. Treasury note has a higher yield than the 10-year U.S. Treasury note. While every recession has been preceded by an inverted yield curve, not every inverted yield curve has led to a recession.

As shown here, the spread between 2-year and 10-year Treasury securities has tightened but has not yet inverted.


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The yield curve has flattened but has not inverted

Sources: Bloomberg and Wells Fargo Investment Institute. Series represents the difference between the constant-maturity 10-year U.S. Treasury and the constant-maturity 2-year U.S. Treasury. For illustrative purposes only. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted. Past performance is no guarantee of future results. One basis point equals 100 basis points. Shaded area indicates a recession as designated by the National Bureau of Economic Research. Data as of March 31, 2018.

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4. Potential asset bubbles

When valuations rise above historical averages, investors are buying equities at a premium price, which may result in asset bubbles.

What we’re seeing

Currently we are not seeing signs of asset bubbles, and believe that most markets are fairly valued at this time.

However, new cash tends to enter the equity market in the later stages of a bull-market run, due to investors’ fear of missing out on market gains.

Such inflows tend to drive up price levels ahead of fundamental measures, like earnings.


View the strategies for an extended bull market


Strategies for an Extended Bull Market

The best — and most difficult — time to prepare for a bear market is before the bull market has reached its end. What strategies are worth considering in today’s market?

More Questions, Answered

The full Investing Late in a Bull Market report lets you know:

  • How close we think we are to the end of this equity bull market

  • How investors typically behave toward the end of an upcycle

  • How asset classes have performed late in the cycle and how performance shifts when an equity bear market occurs

Plus, you’ll find the five actions that may help you prepare for the next bear market.

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Investment Expertise and Advice to Help Clients Succeed Financially

Wells Fargo Investment Institute is home to more than 100 investment professionals focused on investment strategy, asset allocation, portfolio management, manager reviews, and alternative investments. Its mission is to deliver timely, actionable advice that can help investors achieve their financial goals.

For additional investment insights and timely market commentary, visit our website. For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.