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Covers of the 2019 investment outlooks from Wells Fargo Investment Institute and Wells Fargo Asset Management

2019 Investment Outlook: Opportunities amid risks

Two new Wells Fargo outlooks for investors expect the U.S. economy to experience modestly slower growth, higher interest rates, rising debt, and further geopolitical strains in 2019.

December 6, 2018
Kelly Reilly

As the U.S. moves through the 10th year of its long recovery from the Great Recession, investors should prepare for additional market volatility, according to two new outlooks from Wells Fargo Wealth and Investment Management.

Wells Fargo Investment Institute strategists provide a look at what’s ahead for financial markets in 2019. (4:14)

Released Dec. 5, both reports found that investors will likely need agility to make the right investment decisions as they grapple with a modest slowdown in economic growth, interest rate increases, rising debt levels, reduced fiscal policy stimulus, and ongoing geopolitical tensions.

“Now is a good time to take a fresh look at how investment portfolios are positioned,” said Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute and contributor to its “2019 Outlook: The End of Easy,” report. “There are certainly risks out there, but as the expansion continues, we believe there will continue to be opportunities in this maturing bull market.”

The second report, Wells Fargo Asset Management’s “2019 Investment Insights: Expand, adapt, and adjust,” (PDF) emphasizes the importance of managing portfolio risk regardless of the timing in an economic cycle.

“Instead of trying to predict which precise inning the recovery is in, the focus should be on managing the newly emerging risks as the baseball game goes on,” said Brian Jacobsen, senior investment strategist with Wells Fargo Asset Management’s multi-asset solutions team.

The bottom line for investors, according to both reports: Continue to diversify portfolios with a mix of asset classes spanning sizes, geographies, and sectors, focus on the long term, and don’t let increased volatility lead to missed investment opportunities.

No recession in 2019

Tracie McMillion
Tracie McMillion

Both outlooks call for economic growth to continue, but slow down modestly, in 2019. While neither group expects a U.S. recession next year, the likelihood of one increases beyond 2019.

Wells Fargo Asset Management’s outlook includes information for U.S. taxable fixed income on forthcoming interest rate hikes. “Our U.S.-focused teams are generally moving closer to a more neutral interest rate duration (an approximate measure of a bond’s sensitivity to changes in interest rates) positioning with the view that the majority of market participants have priced in the remaining Federal Reserve rate hikes,” the report states.

The Institute, which calls for three rate hikes in 2019, believes the Federal Reserve may end rate increases before the end of 2019.

The U.S. dollar will likely weaken, according to the Institute, and there will be moderate appreciation of the euro, yen, and several emerging market currencies.

“This is where developed and emerging market economies come into play,” McMillion said. “With a globally diverse portfolio, investors can look to these geographies that are attractive from a valuation perspective.”

Positive equity returns expected

Lyle Fitterer
Lyle Fitterer

The Institute expects 2019 could see record-high earnings, despite higher interest rates and somewhat slower economic growth.

The Institute also expects positive equity market returns — even new highs — in 2019 after 2018 brought more modest gains. U.S. large-and mid-cap equities could see low-double-digit returns, and emerging market returns could stretch higher than that.

Top equity sector recommendations for the Institute include consumer discretionary, financials, health care, industrials, and information technology. Based on growth and valuation, emerging market equities look most attractive.

Wells Fargo Asset Management also sees investment opportunities in emerging markets, particularly Asia, and the group sees more opportunities for non-U.S. equities than U.S. equities. “Our international managers that also manage global portfolios are finding more opportunities outside of the U.S.,” said Wells Fargo Asset Management’s Chief Equity Officer Jon Baranko.

For U.S. equities, Wells Fargo Asset Management continues to see opportunities for companies in disruptive information technology and communication services companies. Additionally, “Our U.S. core and value equity teams are finding opportunities within the industrials sector in companies that may be experiencing short-term cost pressures that have impacted valuations,” Baranko said.

Debt, discount rates, and duration

Brian Jacobsen
Brian Jacobsen

Wells Fargo Asset Management’s 2019 Investment Insights offers three key steps investors can consider when managing risk in the upcoming year: expanding views on debt, adapting to changing discount rates, and adjusting portfolio duration.

Corporate and government debt have reached concerning levels, but corporate balance sheets remain healthy.

“Many governments have increased their debt levels to the point that they equal their GDP,” said Lyle Fitterer, co-head of global fixed income for Wells Fargo Asset Management, adding that these so-called debt-to-GDP ratios look much healthier in the corporate sector where many companies have actively worked to reduce them.

One example where this might be particularly problematic, said Fitterer, is if a company incurs too much debt and growth slows. “Then, they might have a hard time servicing that debt,” he said. “To accommodate for this risk, focusing on quality and looking for corporate balance sheet flexibility could be beneficial to investors.”

When risks increase, discount rates — what investors use to value future cash flows — usually rise, he said.

“Many of our portfolio managers are seeking to upgrade the quality of their portfolios to help soften the blow of rising discount rates,” Fitterer said. “This should help fundamental security selection in driving returns.”

Riding the wave of market volatility

Jon Baranko
Jon Baranko

With change, both outlooks caution, comes uncertainty. The Institute expects more volatility in economic activity in 2019, which could also lead to more financial market volatility.

But not bowing out of the market, McMillion said, is key.

“Staying invested with a diversified portfolio throughout full market cycles has its advantages, even though it might not seem like it at the time,” she said.

A recent survey (PDF) by Wells Fargo Institutional Retirement and Trust found just over half of investors — 56 percent — believed “the Great Recession of 2008 taught me the value of diversification as a way to ride out market ups and downs.”

“We don’t want investors paralyzed by fear,” McMillion said. “Our guidance is focused on making sure investors are aware of these specific shifts so they can prepare in advance and not just manage the risks, but also take advantage of the opportunities.”

Investment horizon

Managing risk and uncovering opportunities through such change can be taxing, both outlooks conclude, but also rewarding to investors who stay engaged.

“Without a recession in sight, U.S. equities should continue to perform well,” McMillion said. “And market swings aren’t a signal of the end of the cycle, but rather a good opportunity to deploy cash. A well-diversified global portfolio with all four asset groups — equities, fixed income, real assets, and alternative investments — can help to smooth market volatility.”

“As in baseball, some long games can turn into many extra innings, exhausting fans,” Jacobsen said. “But, if you have the right tools and risk-minded outlook, you can confidently navigate your way through.”


Risks

Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. Mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

Alternative investments carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums.  They are complex investment vehicles which generally have high costs and substantial risks.  The high expenses often associated with these investments must be offset by trading profits and other income.  They tend to be more volatile than other types of investments and present an increased risk of investment loss.  There may also be a lack of transparency as to the underlying assets.  Other risks may apply as well, depending on the specific investment product.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.

General Disclosures

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 opinions expressed reflect the judgment of the speaker and are subject to change without notice.  The information is for general information purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.  WFII does not undertake to advise you of any change in its opinions or the information contained within. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this call. Past performance is no guarantee of future results. Additional information is available upon request. 

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor.  This is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Wealth and Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various banking and brokerage affiliates of Wells Fargo & Company.

Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds.

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Contributors: Wayne Thompson and Ryan Levy
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