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Strategist at Wells Fargo shares his views on where to invest after the recent market pullback.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

Brian Jacobsen, Ph.D., CFA, CFP, is chief portfolio strategist at Wells Fargo Funds Management. In addition to his role at Wells Fargo conducting research and giving presentations on the markets and the economy, Jacobsen is an associate professor at Wisconsin Lutheran College. His research and teaching center on economics, finance and investing. recently caught up with Jacobsen for his thoughts on where to invest after the recent market pullback. Why has the U.S. stock market sold off during the past month, and do you think the bottom has been reached?

Brian Jacobsen: I could be wrong, since it's hard to pick the bottom, but based on all the evidence that I have available to me, I do think that Aug. 25 was the bottom. There is one lingering risk that could upset my projection that Aug. 25 was the bottom, and that would be if the Federal Reserve does something unexpected. If it suddenly decides to hike a little bit more aggressively on Sept. 17, that could throw a monkey wrench into things. Barring that though, I do think Aug. 25 was the bottom.

Now, what triggered the correction? You had a buildup of bad news. You had weak data coming out of China, followed by the devaluation of the yuan. That move was perceived as an act of desperation to try to prop up its markets and its economy.

It fed into this narrative that China was grasping at straws for solutions to avoid some sort of hard landing for its economy. That's really what precipitated things going down. Speaking of that, do you think those concerns about China having a hard landing are warranted? And do you think emerging markets in general are at risk of some sort of financial crisis like that of 1997/1998?

Jacobsen: It's a very reasonable concern, but I don't think that it's going to happen. For all the vices associated with command-and-control economies, one of the virtues is the ability to marshal resources where you need them to be. China will avoid a hard landing because the government has enough different levers it can pull to prop up economic growth.

Granted, there are legitimate concerns about whether that's going to be good for China's long-term health. When its stock market started to sell off back in June, the government started intervening. Instead of taking baby steps toward more market liberalization, it took this great leap backward towards more state intervention. That was unsettling to a lot of people, including myself.

We'll learn a lot more in October when it meets for its fifth plenum, where hopefully it will outline a more coherent strategy for how it’s going to continue the march toward market reforms.

For the other emerging markets, while there are some similarities to the Asian financial crisis in 1997/1998, there are enough differences to really make it different this time. Back then, you had a lot more fixed exchange rate regimes. Now we have a lot more floating exchange rate regimes. And those exchange rates being able to fluctuate can serve as shock absorbers for some of the adjustments that need to take place.

Some areas will continue to struggle. Brazil is going to continue to be a mess as it works through whether it’s going to impeach [President] Dilma Rousseff. Argentina is another mess, as is Venezuela.

We could see some financial crises in select parts of emerging markets and frontier markets, but nothing that's going to be systemic or systemwide throughout all of the emerging markets. You've done a lot of research on the history of bear markets and corrections. What's the difference between the two? Are bear markets typically caused by recessions?
I went through and tried to identify the 25 different bull market corrections that we've had since 1950 and the nine bear markets. I used the definition that a 10 percent or more decline is a correction, but if it gets as bad as 20 percent or more, it's a bear market.

The big difference between the two is the recession. That seems to be a very good indicator about whether a correction becomes a bear market.

There are exceptions; the most notable one being the very rapid decline in 1987. Back then, we had the “flash crash” in program trading, but thankfully that was a very short bear market. That one wasn't associated with a recession, while the other eight going back to 1950 were all associated with recessions.

That's one reason why I'm not that worried today. My recession indicators are still lying dormant. They're not indicating that we'll see a recession anytime within my forecast horizon of six to 18 months out. One concern that I've heard a lot of investors express is that valuations may have gotten stretched earlier this year. Do you think stocks are expensive from a historical perspective?

Jacobsen: No, I don't. Part of it depends on how you look at valuations. There's always going to be some measure of a valuation that is going to indicate that stocks are dirt cheap, and others that are going to say they're incredibly expensive. In a way, valuations are somewhat in the eye of the beholder.

I like looking at what is the current price of a basket of securities relative to the expected next 12 months' earnings per share, and then the longer-term growth prospect. All of that I measure relative to yields in the high-yield market.

Looking at those three factors—expected earnings per share over the next 12 months; longer-term growth rate of earnings; and the conditions in the high yield market—all suggest to me that we're pretty fairly priced in the United States.

According to my model, stocks are about at fair value. Any further gains would be driven by either sentiment or those fundamentals. Assuming we avoid the bear market and the recession, where should investors be looking to invest?

Jacobsen: In the United States, I would overweight information technology and energy. I would market-weight materials and health care. I used to be underweight materials, but the valuations have gotten attractive. If we continue to get evidence of growth from the developed world, and if we see some further evidence of growth in the emerging markets, materials could actually be a very attractive spot.

That said, most of the opportunities are outside the U.S. In my model portfolio, I have a 66 percent allocation to non-U.S. stocks. Most people are probably more comfortable with something closer to 20 to 30 percent max outside of the U.S., but the valuations are so attractive outside of the U.S.—specifically in Europe and in emerging Asia and emerging Europe—that it can warrant a significant overweight.

Of course, things can stay undervalued and they can stay overvalued for very long periods of time. You need to be concerned about the timing, but I do believe this is a good time to be investing in those areas.

Europe is continuing to grow more rapidly than what the consensus is expecting, and I believe China is not going to have a hard landing. If that's the case, that could pull up a lot of emerging Asian markets along with it. That's why I've got a significant overweight to non-U.S. markets.

Related ETFs to Jacobsen’s views are: the Technology Select SPDR (XLK | A-90), the Energy Select SPDR (XLE | A-93), the Vanguard Materials (VAW | A-87), the iShares China Large-Cap (FXI | B-39) and the SPDR S&P Emerging Europe (GUR | F-90).

Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for, with a particular focus on stock and bond exchange-traded funds.

He is the host of’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays,’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.