Wells Fargo Investment Institute’s annual outlook for 2020 calls for investors to be resilient at this late stage of the current economic cycle by positioning portfolios carefully for the right risk-reward opportunities.
Released Dec. 2, “A Call for Resilience” (PDF) foresees investors will again be tested, as they were in 2019, as late-cycle signals continue to crop up in the coming year.
“Investors dutifully weathered the tensions of geopolitical strains, offset by the easing of global monetary policies and a third economic slowdown during the record-long cycle that occurred midyear 2019,” said Darrell Cronk, chief investment officer of Wells Fargo Wealth and Investment Management and president of Wells Fargo Investment Institute.
Despite these challenges, almost every asset class was able to manage and delivered strong returns for the year.
“There were notably strong performances across equities, fixed income, and real assets despite ongoing challenges in the investment landscape,” Cronk said. “Looking ahead, investors can instill resilience in their portfolios during this tricky part of the economic cycle by wisely positioning exposure to risk assets.”
The three “C’s” of economic resiliency
According to Institute strategists and economists from the Wells Fargo Securities Economics team, the current extended period of economic expansion will continue in 2020, albeit with slower economic growth and low inflation expected for the U.S. and the largest international economies. Global gross domestic product, or GDP, is forecast to grow by 3% — down from the 2019 target of 3.6%, and U.S. GDP is expected to expand by 1.8% — down from the 2019 target of 2.3%.
For the global economy to stay resilient, three “C’s” will be imperative, according to Cronk:
- Consumer spending must persist.
- Credit spreads need to remain well-behaved.
- China-U.S. trade relations must calm down.
Low rates could tempt investors to take greater risk
The report projects 2020 will bring modest gains for all major equity classes. While a U.S. recession isn’t expected in the next 12 months, WFII is closely following trends that could raise that risk.
“Global growth remains slow enough that geopolitical disruptions could undercut consumer confidence. The main upside risk is that interest rate cuts eventually could give the global economy some traction, and geopolitical headwinds will subside,” said Paul Christopher, head of global market strategy for WFII.
The Federal Reserve has been carefully cutting rates, including three cuts in 2019. But the adjustment period appears to be winding down, as WFII forecasts just one rate cut in 2020, with a Federal funds target range of 1.25% to 1.50%.
With interest rates hovering near historic lows, this “environment may encourage income-oriented investors to take increased risks,” according to the report, but investors should fully understand the risks associated with lower-rated, fixed-income securities.
Ongoing U.S. job expansion should keep the target unemployment rate at 3.6%, near multidecade lows. Rising average U.S. wages are also expected, which could help continue bringing workers back into the labor force.
Equity returns in an election year
The year ahead will be a pivotal one for investors. While WFII expects a low likelihood of major policy pronouncements, presidential election years in general have produced positive equity results.
According to the report, since 1928, only four of the 23 presidential election years have experienced negative S&P 500 Index returns. Recession or slow recovery from the Great Depression occurred in three out of those four years.
When looking at specific equity sectors, WFII favors comparatively strong earnings and cash flows and attractive cash/debt positions — in other words, sectors with quality and growth characteristics to better “resist the worst of the market volatility we expect amid the uncertainty about the maturing economic cycle and geopolitical uncertainties.”
Putting advice into action
Investors can expect heightened market volatility in 2020, and resilience can aid investors in their decision-making. “History tells us it’s not uncommon for investors to manage through three to four large-cap equities pullbacks of at least 5% each year and market corrections of at least 10% every year or so,” said Tracie McMillion, head of global asset allocation strategy for WFII.
The bottom line in 2020, according to the report, is to position away from higher-risk asset classes. WFII offers investors five considerations for implementing its 2020 outlook guidance into portfolios:
- Cash has an important place in a portfolio as a volatility dampener and a source of funds.
- Focus on higher quality assets.
- Go beyond traditional fixed income for yield. Investors may consider equity dividends as another source of income.
- Defense can be a good offense. Given our expectations for market volatility, we suggest reducing exposure to riskier assets.
- Focus on longer-term diversification, as shorter periods are likely to be more volatile.
WFII will continue to provide timely and actionable investment guidance throughout 2020, including a discussion about environmental, social, and corporate governance investing and a guide to the 2020 elections.
All investing involves risks including the possible loss of principal.
Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.
Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.
Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Dividends are not guaranteed and are subject to change or elimination. Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Real assets are subject to the risks associated with real estate, commodities and other investments and may not be suitable for all investors.
Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
Opinions represent WFII’s opinion as of the date of this release 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. WFII does not undertake to advise you of any change in its opinions or the information contained in this release. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
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