2022 Investment Outlook | Wells Fargo Investment Institute (2022)

June 2022

Faster, further, and fragile

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Investment and Insurance Products are: Not Insured by the FDIC or Any Federal Government AgencyNot a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank AffiliateSubject to Investment Risks, Including Possible Loss of the Principal Amount Invested

Five portfolio ideas for the remainder of 2022

  • Diversify
  • Be defensive
  • Add bonds prudently
  • Manage cash
  • Manage risk

Build portfolio resilience with diversifiers

Although many equity and fixed-income classes may underperform our long-term assumptions as rates potentially rise further and growth continues to wane, diversifiers such as commodities and alternative investments historically have served as a useful portfolio hedge against losses.

The potential diversification benefits of commodities can make them an appealing addition to a portfolio allocation. Hedge fund strategies with low or negative correlations to stocks and bonds may help bolster a portfolio’s resilience through access to strategies that do not rely solely on positive markets for gains.

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Be defensive on equity exposure late in an economic cycle

Against the backdrop of a fast-moving business cycle and global central bank tightening, we favor an equity exposure with a bent toward the higher-quality segments of the asset group.

Specifically, we believe that the U.S. is better positioned to weather the global economic slowdown and rising interest rates than international or U.S. small-cap companies are. These factors likely will affect larger U.S. companies less than smaller ones, and less than European, Japanese and many emerging-market companies.

Thus, we prefer U.S. over international equities, and we prefer large-cap and mid-cap stocks over small-cap stocks. Within U.S. equity sectors, we prefer Health Care, Energy, and Information Technology for their potential to post stable, high-quality earnings.

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(Video) Investors Should Reduce Risk Tolerance: Wells Fargo Investment Institute

Add to fixed-income holdings judiciously in a rising-rate (and inflationary) environment

Looking ahead, we expect high-quality bonds to provide traditional diversification attributes both for income — particularly given that yields have risen — and to help reduce downside participation during periods of heavy equity market volatility.

We believe that investors should continue to position fixed-income allocations somewhat defensively by favoring investment-grade intermediate- and short-term fixed income. Most of the increase in investment-grade fixed-income yields and the associated price declines likely occurred during the first half of 2022. As such, we suggest that investors consider incrementally adding back to U.S. Long Term Taxable Fixed Income to strategic target levels.

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Match cash allocations to time horizon

The unusual market environment so far this year has led to declining values in most asset classes with very few exceptions. Depending on the investor’s risk tolerance, a modest cash allocation may be appropriate during this period of continued market volatility.

For investors with short-term cash needs and time horizons, we believe a higher cash level or short-term bond allocation is prudent to help ensure funding of those near-term goals.

For investors with a long time horizon, we prefer to invest excess cash by dollar cost averaging into the markets over the course of several months to several quarters.*

*A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider his or her ability to continue purchases through periods of low price levels.

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Seek to mitigate downside risk with alternative investments, including hedge funds

Given our expectations for higher market volatility due to slower growth, persistent inflation, and rising interest rates, investments that can mitigate risk and even provide upside potential under these challenging market conditions warrant consideration for an allocation in a diversified portfolio.

Hedge fund strategies, such as Global Macro and Relative Value, offer diversification benefits through lower correlations to traditional stocks and bonds. Global Macro strategies have often performed well when there is a dominant macro trend such as rising inflation and commodities prices. Relative Value strategies seek to take advantage of arbitrage opportunities that are independent of market direction.

For qualified investors with longer time horizons, Private Capital investments with longer lock-up periods may offer additional upside potential. Private Debt strategies, such as Direct Lending strategies, can help insulate portfolios against rising interest rates while offering potentially attractive income streams.

Alternative investments, such as hedge funds, are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program.

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As we try to make sound decisions and keep boundless anxiety at bay, it will help to keep perspective — to be neither an optimist nor a pessimist but a realist.

Darrell L. Cronk, CFA, President, Wells Fargo Investment Institute, Chief Investment Officer, Wealth and Investment Management

(Video) Wells Fargo Investment Institute Favors U.S. Stocks Over International

What do we anticipate happening in the markets for the remainder of 2022? Here’s a look at five key areas.

  • Economy
  • Fixed income
  • Equities
  • Real assets
  • Alternative investments

A bumpy post-pandemic transition

  • A mild recession is now our base case for the end of 2022 and into early 2023. As inflation and monetary tightening ease more perceptibly later in 2023, we expect a nascent economic recovery that markets may project into 2024.
  • We expect U.S. macroeconomic and interest rate advantages to push the dollar higher against developed market currencies. Emerging market currencies may find more support but are unlikely to broadly outperform the dollar.
  • A more challenging economic environment calls for a more defensive stance within and across asset classes, in our view.

Wells Fargo Investment Institute targets

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Source: Wells Fargo Investment Institute, June 14, 2022. GDP = gross domestic product; CPI = Consumer Price Index. The CPI produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

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Fed policy dilemma supports higher yields

  • We expect uncertainties and market volatility to increase in the second half of 2022 while the Federal Reserve (the Fed) struggles to tame inflation and avoid an economic recession.
  • We believe that the technical imbalance between municipal supply and demand will serve as a strong backdrop for municipal performance.
  • We favor playing defense in bond portfolios today. We prefer short-term and intermediate-term maturities while interest rates continue to rise modestly. We prefer not to increase allocations or extend down the credit spectrum into high-yield fixed income at this time.

Wells Fargo Investment Institute targets

Year-end 2022Year-end 2023
10-year U.S. Treasury yield3.00% –3.50%2.50% –3.00%
Federal funds rate2.50% –2.75%3.25% –3.50%

Source: Wells Fargo Investment Institute, June 14, 2022. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

(Video) Don't Give Up on China, Wells Fargo Investment Institute Says

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Positioning for late-cycle dynamics

  • We expect earnings growth to slow in 2022 and shrink in 2023. However, we believe valuations will rebound in 2023 to lift equity markets by year-end.
  • As the cycle matures, our preferences have moved away from cyclicals. Instead, we favor higher-quality asset classes and sectors.
  • We believe quality and selectivity today will at least partially offset near-term headwinds and potentially benefit from positive structural forces we expect in the coming years.

Wells Fargo Investment Institute targets

S&P 500 Index

Source: Wells Fargo Investment Institute, June 14, 2022. S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. An index is unmanaged and not available for direct investment.

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2022 commodity rally likely to slow, reaccelerate in 2023

  • Commodity prices are unlikely to repeat the stellar performance they’ve had since mid-2020, yet we do expect more upside through 2023 and favor holding a full allocation in a broad-based commodity position.
  • Real estate investment trust (REIT) fundamentals appear solid, yet higher interest rates may weigh on relative performance; therefore, 2022 opportunities and risks appear balanced.
  • Among Midstream energy companies, we prefer C-Corporations for their strong corporate governance and their ability to attract institutional fund flows.
(Video) 2020 Wells Fargo Investment Institute Outlook Video

Wells Fargo Investment Institute targets

Year-end 2022Year-end 2023
WTI crude oil$90 –$110$100 –$120
Brent crude oil$95 – $115$105 – $125

Source: Wells Fargo Investment Institute, June 14, 2022. WTI = West Texas Intermediate. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

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Meeting late-cycle needs with alternatives

  • Late cycle can be an opportune time to allocate to alternative investment strategies that have low correlation to equities and fixed income.
  • For the near future, we favor strategies to help enhance equity and credit market diversification, as well as inflation-adjusted yield, both of which are available through Relative Value and Global Macro hedge fund strategies.
  • For investors with longer-term investment horizons, we foresee Private Equity opportunities among small- and mid-cap buyouts.

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Wondering what to look for next? Download the full report.

The full 2022 Midyear Outlook from Wells Fargo Investment Institute offers more insights and guidance for investors including:

  • • Our full forecasts for year-end 2022 and 2023

  • • Details on favored asset classes and sectors

  • • Deeper dives into every market sector

  • • More information to help guide your investment decisions

  • Download the full report (PDF)

2022 Investment Outlook | Wells Fargo Investment Institute (8)

Learn about Wells Fargo Investment Institute Ways to work with us

(Video) How the Wells Fargo Advisors’ Intuitive Investor Account Works

Company earnings continue to trend higher, providing valuation support and the basis for stock prices to move higher in 2022. Our investment strategists from U.S. Bank share important insights key to helping investors position their portfolios for the year ahead.

A core tenet of investment theory hinges on prevailing interest rates or bond yields; as interest rates on safe assets rise, all other asset prices should fall, and vice versa.. In client communications throughout this year, we have shared the concept of two potential “repricings”: the first being the Fed’s interest rate increases, which could provide some price volatility, and the second representing the risk higher interest rates and elevated prices could impact consumer and business activity with a commensurate decline in riskier asset classes like stocks.. High global inflation and higher interest rates likely keep economic growth low and perhaps risk recession if companies are unable to pass along cost increases.. Our view: Elevated equity market price volatility is likely to continue while uncertainty surrounding inflation and the Fed’s interest rate hiking path and the potential impact on corporate earnings growth persists.. Our view: Europe’s proximity to the Russia/Ukraine conflict, a surge in commodity price inflation, renewed China lockdowns and major central banks initiating or announcing plans to raise interest rates to combat elevation are headwinds for foreign equities’ growth prospects.. A lower valuation reflects investors’ demand for higher compensation for taking on equity price risk considering Europe’s disproportionate impact from elevated hydrocarbon prices and sluggish economic growth prospects.. Our view: Rising interest rates have already damaged real asset markets and still higher rates are needed to inflict more serious downside price action.. The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets.. Private Equity Index is based on returns data compiled for U.S. private equity funds (including buyout, growth equity and mezzanine funds) that represent the majority of institutional capital raised by private equity partnerships formed since 1986.. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments.. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains.. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity.

Wells Fargo Investment Institute (WFII) today released its 2022 Midyear Outlook: Faster, Further, and Fragile. WFII anticipates that while the economi

SAN FRANCISCO--( BUSINESS WIRE )--Wells Fargo Investment Institute (WFII) today released its 2022 Midyear Outlook: Faster, Further, and Fragile .. “Thus far, 2022 has been trying for investors, with negative year to date returns for both equities and bonds,” said Darrell Cronk, chief investment officer for Wealth & Investment Management.. The report provides WFII’s economic and market forecasts, as well as the outlook and preferred areas of investment for each of the following asset groups:. • Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable.. Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss.. 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.. Some of the risks associated with the representative asset classes include: Stock markets, especially foreign markets, are volatile.. About Wells Fargo Wealth & Investment Management. Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company.. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company and is one of the largest wealth managers in the U.S., with more than $2 trillion in client assets.. 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.. Wells Fargo & Company (NYSE: WFC) is a leading financial services company that has approximately $1.9 trillion in assets, proudly serves one in three U.S. households and more than 10% of small businesses in the U.S., and is a leading middle market banking provider in the U.S. We provide a diversified set of banking, investment and mortgage products and services, as well as consumer and commercial finance, through our four reportable operating segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth & Investment Management.. For information about factors that could cause actual results to differ materially from our expectations, refer to our reports filed with the Securities and Exchange Commission, including the “Forward-Looking Statements” discussion in Wells Fargo’s most recent Quarterly Report on Form 10-Q as well as to Wells Fargo’s other reports filed with the Securities and Exchange Commission, including the discussion under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, available on its website at www.sec.gov .

The H2 economic outlook will feature divergences in growth, inflation and policy mix across regions. Stagflation risk will be a common feature across Developed Markets (DM). In addition, since there will no longer be a synchronous global cycle, country risk is back.

Rising recession risk amid high inflation We expect economic momentum to slow in H2 , as inflation acts as a regressive tax on consumers with huge divergences across regions, countries and sectors.. Building stagflation-proof portfolios In a fragmented world featuring high inflation, a growth slowdown and falling global liquidity, investors need to look for sources of positive real return and gain exposure to assets that can protect against high inflation and low growth.. Regarding real assets , we favour real estate and infrastructure as an inflation hedge and private debt with floating rates, while we are more cautious on private equity markets, amid some areas of excess valuations.. In particular, in Q1 2020 the Covid-19 pandemic triggered a simultaneous significant rise in the correlation of risky assets (DM and EM equities, credit, EM bonds and commodities), with US Treasuries continuing to act as a unique diversifier together with Chinese aggregate bonds, amid the prevailing risk-off environment.. Inflation is also a key theme across EM In the fixed income universe, we favour HC bonds in particular the HY segment, which should benefit from a strong USD and high oil prices We see less support for LC debt, which is more exposed to rising US rates and the ongoing monetary policy tightening across EM We remain cautious and tactically selective on EM FX as we move into H 2 due to USD strength, high inflation and weak macro momentum.. Market triggers growth recovery starting from China To watch rising US rates and appreciating dollar Risks CB policy mistakes, Covid 19 curbs in China. Despite intensifying growth concerns, inflation risks remain supported by higher-than-expected CPI prints, driving bond yields up, alongside the upward repricing of the expected rate increase path, both in Europe and in the US.. High growth stocks: A high growth stock is anticipated to grow at a rate significantly above the average growth for the market.

Transformative technologies like artificial intelligence and CRISPR are bringing new opportunities for investors. Here's what to know in 2022 and beyond.

Scroll down to next section Investment and Insurance Products are : Not Insured by the FDIC or Any Federal Government AgencyNot a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank AffiliateSubject to Investment Risks, Including Possible Loss of the Principal Amount Invested. Disruptive, transformational technologies like AI and the gene editing breakthrough CRISPR, are entering a new era that likely will impact our lives and drive innovation for decades.. The simultaneous increase in both data and computational speed has ignited interest among computer scientists in building algorithms to organize and analyze data — driving a new era of AI.. For more ideas about how to leverage these advancements over the next decade, read our Wells Fargo Investment Institute special report: Transformative technologies — Investment opportunities in artificial intelligence and genomics.. 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.. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector.. 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.. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.. Only recently have AI’s three key ingredients — big data, faster computers, and machine learning algorithms — converged to propel the technology increasingly into new uses.. Research classificationCurrent and future areas of focusRole of CRISPRCancerChronic Myeloid leukemia (CML), Ewing Sarcoma, anaplastic large cell lymphoma (ALCL), prostate and breast cancersPrevention and treatment of various cancers by isolating and removing DNA mutations and replacing those sequences with normal, healthy DNACardiovascular diseaseChildhood onset cardiomyopathy, Marfan syndrome, congenital heart disease, long QT syndrome and other hereditary heart conditionsRepair mistakes in cardiac muscle tissueMetabolic diseaseObesity, diabetes, and hyperlipidemiaResearchers are applying CRISPR/Cas9 technology to stem cells to understand better the molecular mechanisms of diabetesNeurodegenerative diseaseHuntington’s, Alzheimer’s and Parkinson’s diseasesGene editing platforms are offering researchers a better method of studying gene functions and their impact on neurodegenerative diseases.Viral diseasesCOVID-19, HIV, human papillomavirus, Hepatitis BAside from CRISPR/Cas9 being an invaluable tool in constructing the COVID-19 vaccine, scientists have used gene editing to produce HIV-resistant T cells.Hematological diseasesHemophilia and Sickle Cell AnemiaChromosome inversions, which can be corrected using CRISPR/Cas9, can affect how genes direct blood clotting.. Wells Fargo Advisors Global Securities Research analysts believe that disruptive technology such as AI and CRISPR will touch multiple sectors and industries over the next decade.. Gene therapy, gene editing, gene silencing, cell therapyNear-term expectationsCompanies with “deep pockets” of capital and data should prevail.. Technology exchange-traded funds (ETFs)Technology mutual funds (MFs)Most technology ETFs passively replicate a particular technology index.

Weekly stock market commentary from Wells Fargo Investment institute with a focus on technical analysis and an outlook for the US equity market.

Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.. Definitions Bloomberg Commodity Index is comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.. Opinions represent GIS’ opinion as of the date of this report 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.. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

Here's how to make the most of today’s dicey market.

The bear that's been lurking on Wall Street all spring finally stepped out of the shadows on June 13, taking hold of what is now officially a bear market.. That closed the books on the COVID-era bull market that took off in March 2020 and delivered a 114.4% price gain.. The market had tiptoed close to bear territory in May, then mounted a convincing rally.. Bear-market rallies are fairly common, with 17 of 26 bear markets since 1929 recording upswings with gains of 10% or more, according to BofA.. Those ended up being deeper, on average, than the three not associated with recessions – an average 35% decline versus a 28% drop, respectively.. Strategists at investment firm Nuveen believe the economy is headed for either a soft landing (averting a recession) or a mild recession.. Inflation moderates, economic growth stays positive, and the job market weakens slightly but remains robust.. Indeed, corporate insiders are betting on better days, according to Leuthold research, having stepped up buying lately.. Bargain hunting is a big part of a bear-market playbook.. Don't abandon strategies that have served you well in good times.. You're already dollar-cost averaging if you're a 401(k) investor and your contributions are on autopilot.

Videos

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