The front cover of the 2020 midyear outlook report ‘Recession, Recovery and Resilience.’ To the right is a quote from Paul Christopher: ‘We want people to plan for the recovery that we think is beginning even now.’
Financial Health
June 16, 2020

2020 midyear outlook: ‘A time of opportunity, but resilience and flexibility are needed’

Wells Fargo Investment Institute’s 2020 midyear outlook outlines changes to consumer behavior, business operations, and opportunities in health care beyond current uncertainties.

As investors wonder what the next 18 months and beyond will look like, investment strategists are observing new global market trends, as well as established trends that are accelerating as the pandemic evolves.

While previous outlooks have covered a shorter period of six to 12 months, Wells Fargo Investment Institute’s 2020 midyear outlook horizon was extended in an effort to prepare investors for the next 18 months of recovery, and even the next three to five years.

“What we want investors to focus on is that we foresee some market turbulence in the coming months, but also a higher trajectory for U.S. large-cap equity returns through 2021,” said Paul Christopher, head of Global Market Strategy for Wells Fargo Investment Institute. “We want people to plan for the recovery that we think is beginning now.”

More than 44 million jobs have been lost in recent months, surpassing the number of jobs created in the economic expansion of the past decade, Christopher noted, but the U.S. economy is on track for a turn higher. In fact, some of the trends noted in this year’s report were in place before the pandemic, and are notable for their rapid acceleration. Other trends are new and could begin to have dramatic impacts on the U.S. economy by the end of 2021, and beyond.   

Black text on a yellow banner: Consumption patterns are likely to change

Consumer behavior, which heavily influences the economy, was already trending toward an emphasis on saving. Now these trends are accelerating amid early signs of recovery from a pandemic-fueled recession — characterized by job losses, an oil market crash that was made more steep by a decrease in travel, and the inability to physically get out and support brick-and-mortar businesses.

“We will continue to see bankruptcies and rising unemployment even as shoppers come out of their lockdowns and begin to spend again,” Christopher said.

“We will continue to see bankruptcies and rising unemployment even as shoppers come out of their lockdowns and begin to spend again.” — Paul Christopher, head of Global Market Strategy for Wells Fargo Investment Institute

The current generation of workers, including many who also endured the market crash in 2008, may feel a need for saving similar to that of the generation who grew up during the Great Depression and World War II, said Christopher.

“We want investors to make sure they are positioned for emerging opportunities, but to be patient while loan defaults rise and spending recovers only gradually,” he said. “We don’t think everyone will be able to get their jobs back quickly, and we do think people will be more cautious of debt and will keep saving — to the extent that they can.” 

Text overlay: ‘U.S. personal savings as a percent of disposable personal income’ data points on a slight decline, then late, sharp incline, charted on a graph from 1959 to 2019.
After a multidecade decline, the U.S. personal savings rate has shown a significant increase in recent years as consumers respond to economic shocks.
Photo: Bloomberg and Wells Fargo Investment Institute
Black text on a yellow banner: Businesses will reassess how to add flexibility while maintaining efficiency

Even for the businesses that will emerge from the pandemic relatively unscathed, there will be major changes to how people and processes work. Adjusting for more employees to work from home and adding jobs that require employees to serve customers in different, socially distant ways will be part of the flexibility required of businesses.

Global competition was pushing supply chains to be more efficient, even before the pandemic. Looking ahead, supply chains may need to add redundancy, in case new lockdowns somewhere unexpectedly shut off the flow of component parts.

“Companies may improve their efficiency by using technology to better understand their inventory levels, to predict what components will be where and when, and if weather or local labor and economic conditions may interrupt supplies." — Wells Fargo Investment Institute’s 2020 midyear outlook

Adding to the trend toward increasing technology use, businesses will need to rely more on technology to track their changing supply chains. Companies may improve their efficiency by using technology to better understand their inventory levels, to predict what components will be where and when, and if weather or local labor and economic conditions may interrupt supplies, according to the report. The report concludes that Information Technology and Communication Services will continue to be favored sectors for investments as a result.  

Black text on a yellow banner: The pandemic is likely to intensify existing stresses globally

Changes to supply chains for American businesses were already leading to impacts on markets around the world. Trade tensions toward the end of 2019 added to the cost of production in China, for instance. Commodity prices also began to fall, impacting debt in countries known to be commodity producers, such as Brazil, Indonesia, and South Africa.

These issues will likely accelerate the ongoing trend toward global market stress. “Public U.S. debt is the largest debt market in the world. Everybody’s rainy day fund is full of Treasury securities from the U.S.,” Christopher said. But not every country around the world enjoys such high confidence from global investors. “Debt levels in emerging economies are becoming problematic again.”

“Public U.S. debt is the largest debt market in the world. Everybody’s rainy day fund is full of Treasury securities from the U.S.”  — Paul Christopher, head of Global Market Strategy for Wells Fargo Investment Institute

The report notes that investors tend to exit the markets of emerging countries in crisis, which can accentuate the effect of crises and make larger economies, like those of the U.S. and China, grow stronger. This trend indicates that the U.S. dollar will remain strong.

Still, the U.S. is not immune to the increased need for government spending as a result of the pandemic, which can add to debt issuance. Placing an increased emphasis on public health, while governments work to slow or stop the spread of COVID-19, is going to be costly.

Black text on a yellow banner: Government influence in the economy will increase — for better or worse

Greater government involvement in the economy is likely in order to get past the pandemic. The report foresees greater government involvement in expanding the health care system, funding research and development, and coordinating between local health officials and federal agencies. As these changes develop, the large portion of the U.S. economy dedicated to mandatory federal spending is likely to increase. The Institute’s midyear report notes the potential benefits and risks in this trend.

Bailouts, for example, which encourage economic recovery, can cause private firms to take risks on more debt, with the expectation that another bailout is coming.

Another risk to financial markets is that the government is accepting equity or warrants from private companies as a form of compensation for bailouts, which increases government ownership or control of some industries.

Though many countries have broad income support programs and choose which industries to promote with public funds, this could become a new trend in the U.S. that Christopher cautioned can increase spending and potentially the public debt. Another risk is a closer coordination between monetary and fiscal policy that eventually may challenge the independence of the Federal Reserve.

“History tells us you can’t just borrow indefinitely,” Christopher said. “Or as my grandfather used to say, you can’t go back to the same well too often. It’ll run dry.”

Black text on a yellow banner: Health care will play an increasingly prominent role in the future

U.S. health care spending is already a significantly large share of national output, and it is expected to become an even larger investment focus, owing to the pandemic.

“We believe the health care system will expand even faster,” the report states.

A bar graph titled ‘U.S. health care expenditures are significantly greater than those of other developed countries’ shows nine countries' GDP percentages compared to the OECD average. U.S. is the highest at 16.9, compared to the OECD average of 8.8
The U.S. health care system was about 17% of the U.S. economy in 2018, which was nearly double the 9% average share among the world’s most developed economies.
Photo: Organisation for Economic Co-operation and Development (OECD) and Wells Fargo Investment Institute

An increased need for technology is also part of this trend, Christopher noted. Innovations are already taking place to treat patients with non-COVID-related health problems virtually while doctors and hospitals are occupied with fighting the coronavirus.

This presents an important potential investment opportunity, and one that could lead to the development of health care systems better able to care for aging populations and possible future epidemics.

The report concludes that these new or accelerating trends create potential risks and opportunities that differ from those of the recent past. And, considering that market volatility is likely to attend the cross-currents and occasional disappointments of the early economic recovery, resilience and flexibility should remain key traits for successful investors. The report recalls the words of Warren Buffett: “The most important quality for an investor is temperament, not intellect.”


All investing involves risks including the possible loss of principal.

Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. 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. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

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. This can result in greater price volatility. Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. 

General Disclosures

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