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Investors' appetite for risk increases slightly

August 21, 2012

The stock market may run into some upside resistance at this point, and volatility
could increase. However, investors' appetite for risk appears to have increased during the past few
weeks. Therefore, the stock market could still have further upside potential.

-Gary Thayer, chief macro strategist, Wells Fargo

During the first few weeks of this summer's rally,
investor sentiment was very negative and many
investors seemed to favor defensive strategies. In
June and July, the historically-less-volatiledefensive sectors of the stock market
outperformed the more-volatile-cyclically-sensitive
sectors. At that same time, investors favored
bonds over stocks, driving U.S. Treasury yields
down to record low levels. As a result, the yield
curve flattened as the spread between longermaturity bonds and shorter-maturity securities
decreased. This flattening of the yield curve was a
sign that many investors thought that the economy
was heading toward further weakness not
strength.

Recent market activity suggests that sentiment has
changed as the stock market climbed the wall of
worry this summer. Investors now seem to be less
defensive. As a result, the defensive sectors of the
stock market are not doing as well as the
economically-sensitive sectors of the market. For
example, the utility sector and consumer staples
sector have underperformed the overall stock
market during the past few weeks as the demand
for these perceived-safe-haven stocks has
declined.

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