Last year ended on a low note for investors as the Dow Jones Industrial Average and S&P 500 Index recorded their worst December performance since 1931. But the investment outlook in 2019 soon improved, thanks to a global stock rally that kicked off the year and quelled fears of a sudden recession.
So what do current conditions signal for the second half of 2019? Strategists from Wells Fargo Investment Institute (WFII) involved in developing the 2019 Midyear Outlook report offer these six investment insights.
Be tactical in the short term
No matter how broadly you’re invested, rebalancing is the most important theme right now, says Paul Christopher, CFA, Head of Global Market Strategy at WFII.
Here’s an example of how that could work. WFII’s year-end forecast for the S&P 500 Index goes above 2,800. Christopher says that when the index was around that figure in the spring of 2019, it was a good time to realize gains. Then, when the market dips—as it did in December 2018—reinvesting would put those gains back to work.
“We don’t think you should be hesitant to move,” Christopher says. “When the market gives you a year’s worth of returns in two months, take action.” Learn more about diversification and rebalancing in “Why Diversification Matters Now.”
Look to emerging market equities
WFII strategists are bullish on emerging market stocks, pointing to the potential for improved earnings growth and better valuations. Why? Fast-growing economies such as China, Mexico, and Brazil have grown less reliant on commodities or international growth. Now, they’re seeing their own middle classes grow, as well as the growth of business in domestic or other emerging markets. WFII also expects to see progress on a trade deal between the U.S. and China, as well as more economic stimulus on the part of the Chinese government.
Be more selective in bonds
Factors such as the U.S. Federal Reserve’s pause on interest-rate hikes in March and an inverted yield curve have impacted the bond market. Due to these factors, WFII scaled back its expectations for rising rates but remained focused on fixed income as a key part of a diversified portfolio. “You may want to be a little bit more defensive in bonds,” says Tracie McMillion, CFA, Head of Global Asset Allocation Strategy at WFII. “Keep an eye on higher credit quality and shorter durations.”
Stick to your long-term plan
Don’t allow market movements—especially drops or declines—to shake your confidence. “When there’s fear in the market, be careful about letting that fear affect you,” McMillion says. “If time is on your side, you likely can weather such storms.” A well-thought-out, diversified portfolio is likely to benefit from current market conditions.
Be open-minded around cash
WFII gave cash assets a favorable rating in March. This was a turnaround from a years-long stretch when returns in cash assets were hard to come by. Adding cash assets to a portfolio isn’t a fearful response to the threat of recession, but instead a way to preserve principal while seizing opportunities in riskier asset classes. “Be ready to deploy cash, whether you’ve just set it aside or you’ve been holding onto profits from this long bull market,” Christopher says.
Check your exposure to alternative investments
“As we enter this period of ‘the end of easy’ where longer-term trends look more difficult to sustain, qualified investors may have to look around to mitigate some of the risk,” McMillion says. WFII has a favorable rating on hedge funds, particularly equity and relative value strategies, for their potential to generate absolute returns through down periods.
And with the tightening credit market, consider opportunities in private debt, especially distressed debt. “Defaults remain low,” Christopher says, “but some companies are starting to show stress, which could lead to underpriced debt.”
Discuss these six themes with your investment professional to understand how these strategies may relate to your portfolio.
