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Six Considerations for Investors Facing Economic Uncertainty

Darrell Cronk, President of Wells Fargo Investment Institute, shares his thoughts on the current environment for investors and how to help manage portfolio risk in 2020.

A man standing on a mountain peak looks at the sun peeking through the clouds.

Trade disputes, geopolitical concerns, and slowing global economic growth are stoking market volatility—and leaving many investors wondering what’s next. Darrell Cronk, President of Wells Fargo Investment Institute, doesn’t see a recession as imminent, despite the growing economic uncertainty. But, he says, metaphorically speaking, it may be wise to carry an umbrella, just in case.

“We are going to have another recession,” says Cronk, who also serves as Chief Investment Officer of Wealth and Investment Management at Wells Fargo. “I can’t tell you when or the exact cause, just as I can’t tell you when it will rain. But it will rain, and the time to carry an umbrella is now.” (Learn more about what may happen with Wells Fargo Investment Institute’s 2020 Outlook.)

Cronk, who presented at Wells Fargo Global Investment Symposium in New York on December 3, offers six considerations for investors regarding the investment outlook in 2020.

1. Avoid sitting on the sidelines

While you cannot invest directly into an index, they can help illustrate the potential impact of taking action or not. Cronk points out that, over the last 20 years, the S&P 500 Index has returned approximately 6% per year. That said, if you’d stayed on the sidelines during that same period for only 10 of the index’s best days—most of which occurred during recessions—your return would only be 2% a year.

“Investors often think of the markets in a binary sense, in or out, invested or go to cash,” he says. “We think that’s a mistake.”

Instead, Cronk says investors should consider analyzing the overall exposure to risk in their portfolio. To do that, ask yourself two questions: Are you comfortable with the level of risk in your portfolio? Do you feel like you’re getting compensated for the risk you’re willing to take? Cronk feels that investors should take a hard look at more volatile asset classes, like U.S. small-cap stocks, emerging market equities, and high-yield bonds, where the risk might outweigh the reward. “We’re looking for more quality and more defensive yield,” he says. “And we’re being smart about risk.”

2. Think of it as a ‘bend-but-not-break’ economy

Geopolitical risks abound, from trade tensions to the impact of the upcoming elections. And manufacturing activity has slowed. But the U.S. economy is still growing at or near 2% a year, which is down from 2018 but still a far cry from a recession. “It’s been a bend-but-not-break economy, and the same can be said for the markets,” Cronk says.

History, he says, tells us that one of three events typically precede a recession:

  • A mistake by the U.S. Federal Reserve, typically a case of overtightening that crimps growth
  • An unexpected spike in inflation
  • An event with far-reaching, global impact, such as 9/11 or the 1970s oil embargo

“The first is a bit of risk, given the Fed’s about-face toward cutting interest rates this year,” Cronk says. “We still see inflation being fairly benign, so we don’t see much risk there.”

3. Keep in mind “it’s not all gloom and doom”

Economic uncertainty indexes Cronk and his team keep a close eye on hit all-time, multidecade highs in 2019—yet we remain in a bull market. “People are worried, and I understand that,” Cronk says. “But we’ve been worried about the deficit since the 1980s, and geopolitics are always with us. You can’t let that freeze you into inaction.”

The good news, he says, is there are signs that economic expansion could continue and even strengthen. Consumer spending remains strong, and recent wage growth and near record-low unemployment levels could continue that trend. There are signs that the industrial slowdown “may be bottoming out and turning around,” Cronk says. “It’s not all doom and gloom.”

4. Remain committed to diversifying and rebalancing

Cronk reminds investors that, despite recent market volatility, the S&P 500 Index advanced about 20% year to date through October 31, 2019, while bond markets offered three to four years’ worth of returns in 10 months. “We’ve seen eye-popping returns,” he says, “but just as we believe this isn’t time to pull out, it’s also not time to be complacent.”

Diversification is key to preparing for a potential downturn, so Cronk advises investors to consider increasing their exposure to hedge funds and private capital if they qualify. Among his reminders: Be strategic with cash, using it selectively during market pullbacks, rather than sitting on a pile of it. Know what you’re invested in, because sentiment can overcome true value toward the end of economic cycles. Keep an eye on asset allocation, and consider rebalancing—moving some dollars from the highest-performing investments to those that may not have seen as much growth. “Investors might be over-exposed to equities, for example,” Cronk says. “Rebalancing is likely the first, crucial step to help prepare their portfolio for whatever may come next.”

5. Think more about a total return scenario

There is approximately $17 trillion invested in bonds with negative interest rates, which shows how hard it is to find perceived safe places to put capital and earn interest. Consider thinking more about a total return scenario, Cronk says, rather than specifically targeting fixed income. Within equities, consider preferred stocks and higher-dividend-paying blue chips, many of which may yield 3% or more.

Bottom line, he says: “There are creative ways to supplement that income component without tying up money in fixed income-type investments.”

6. Look at the long term for more potential opportunities

For Cronk, the medium- to long-term investing picture is much less cloudy. For the next five to 10 years, he points to investment categories related to climate change, energy efficiency and energy storage, as well as health care, education, and homebuilding as potential opportunities. Technology offers potential opportunities as well, with 5G, cybersecurity, data security, and privacy areas investors should consider. In the long term, he recommends keeping an eye on megatrends such as changing demographics—especially population and wealth growth in emerging markets—regionalization vs. globalization, and an eventual interest-rate increase.

“We’re probably going to see higher volatility for a time,” Cronk says. “But that in itself can create opportunities for well-informed investors.”

Mike Woelflein is a business and investment writer based in Yarmouth, Maine.

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Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this article was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this article and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this article. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this article.

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