Video Title: 2019 Outlook: The End of Easy
From Wells Fargo Investment Institute
Can this long recovery and the bull market continue through 2019?
Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute: June 2019 completes 10 years of economic growth. For most of this expansion, the pace of growth has been slow, but low inflation contained costs and propped up profit margins.
As long as earnings continue to grow and inflation stays benign—as we expect—then equity market valuations can remain firm and, in our opinion, equity markets should make new highs in 2019.
So, even though we may see more periods of market volatility, our work suggests we are still a long way from recession.
Tracie McMillion, CFA, Head of Global Asset Allocation Strategy, Wells Fargo Investment Institute: Without a recession in our sights, we think U.S. equities should continue to perform well. And while the economy and earnings are still growing, we view market swings not as the end of the cycle or the bull market, but potentially as good opportunities to deploy cash—even incrementally.
Globally, we believe developed and emerging equity markets could see headwinds start to fade, which could result in positive returns in 2019.
What are the opportunities and risks with rising interest rates?
Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute: The long cycle should put more upward pressure on bond yields and create more volatility in credit markets. And so we prefer moving up in credit quality.
What’s more, rising long-term yields make us favor shorter-term fixed-income investments.
[On-screen graphic: Fixed income guidance: • Shorter term fixed income • Municipal bonds]
And we still see opportunities in municipal credit markets—thanks to limited supply, increased investor demand in high-tax states, and greater financial flexibility among municipal issuers.
Tracie McMillion, CFA, Head of Global Asset Allocation Strategy, Wells Fargo Investment Institute: We believe most investors should hold some fixed income in their portfolios for its generally more-stable returns and ability to generate income.
Higher interest rates are normally good for savers, but they can put stress on weaker borrowers and may lead to some credit downgrades and possibly defaults in the bond market.
[On-screen graphic: Portfolio guidance: • Higher quality • Shorter duration fixed income assets]
We suggest holding higher quality and shorter duration fixed income assets in investment portfolios.
How should investors prepare for an increase in market volatility?
Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute: In the last decade, it was easy to watch equities and bonds rise together, with low volatility, and to see the U.S. outperform international markets.
But now the end of that time may have arrived—it’s the “end of easy.”
[On-screen graphic: The End of Easy means: • Do homework • Invest globally • Rotate sectors • Keep bonds]
That doesn’t mean the cycle is over but, from now on, investors may have to do more homework: To build a truly global portfolio, to rotate among sectors, and to keep bonds in the portfolio.
Tracie McMillion, CFA, Head of Global Asset Allocation Strategy, Wells Fargo Investment Institute: Investors should prepare their portfolios for continued volatility in 2019.
[On-screen graphic: Portfolio guidance: • Diversify • Include all 4 asset groups • Rebalance for greater value]
A well-diversified, global portfolio that includes all four asset groups—equities, fixed income, real assets, and alternative investments—can help to smooth market volatility.
Investors can take advantage of volatile markets by rebalancing into assets that have declined in price and may present attractive values.
Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute: For more information on how your portfolio will be affected by economic trends in the coming year, download our Wells Fargo Investment Institute report—2019 Outlook: The End of Easy.
All investing involves risk including the possible loss of principal.
Diversification does not guarantee investment returns or eliminate risk of loss.
Asset Class Risks
Each asset class has its own risk and reward characteristics which should be evaluated carefully before making any investment decisions. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Both stocks and bonds involve risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Bonds are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Foreign investing involves greater risk than those associated with investing domestically including political, economic, currency and the risks associated with different account standards. These risks are heightened in emerging markets. Real assets are subject to the risks associated with real estate, commodities and other investments and may not be suitable for all investors. Alternative investments trade in diverse complex strategies which may expose investors to considerable risks. Be sure you are aware of, and understand all risks associated with a particular investment before investing.
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