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4 tips for investing in volatile markets

Market volatility continues after 2018 ended with record equity lows. Darrell Cronk of Wells Fargo Investment Institute surveys the way forward in 2019.

January 31, 2019

Whenever the market begins to swing wildly, Financial Advisor Sandra McPeak calls her clients at Wells Fargo Advisors in Rolling Hills Estates, California.

Financial Advisor Sandra McPeak with Wells Fargo Advisors.
Sandra McPeak is a financial advisor with Wells Fargo Advisors.

“I remind them about the importance of having a diversified portfolio that is actively managed and rebalanced,” McPeak said, “so if they feel they’re not being proactive with their money, they know that their investments are being rebalanced based on the latest investment insights research from the Wells Fargo Investment Institute.”

Her proactive approach prevented a flood of calls from panicked investors when the markets dropped sharply in December, she said.

It’s not uncommon for investors to have plenty of questions when there’s a jolt in the market, said Darrell Cronk, president of Wells Fargo Investment Institute and chief investment officer of Wells Fargo Wealth and Investment Management. Among them: Should they cash out or postpone retirement? Is the bull market over? Is a long bear market coming? Are we entering a recession?

In this Q&A, Cronk discusses what the latest volatility means for investors, whether they’re large or small, and whether they’re retiring soon or just starting their nest eggs.

Darrell Cronk, president of Wells Fargo Investment Institute and chief investment officer of Wells Fargo Wealth and Investment Management.
Darrell Cronk is president of Wells Fargo Investment Institute and chief investment officer of Wells Fargo Wealth and Investment Management.

Q: Wells Fargo Investment Institute’s 2019 outlook calls for the ‘end of easy’ — including more market volatility. Is that what we’re seeing now?

We had been expecting higher volatility across equities, interest rates, and currencies for a while now — since we released our 2018 midyear outlook. That volatility showed up late last year as the S&P 500 dropped almost 20 percent from its Oct. 3 peak of 2,925 points to its Dec. 24 close at 2,351. In fact, December 2018 was the worst month for U.S. equites in 87 years. In our 2019 outlook, we said we expected higher volatility to continue across asset classes than investors have experienced through much of this recovery cycle. But we do not believe they will be as dramatic as we’ve seen recently.

Q: Have these declines changed the Institute’s outlook for 2019?

No. We still do not see the current economic expansion ending in 2019. While global and domestic economic growth is slowing, we believe the concerns of a 2019 economic recession are overblown. However, we have modestly lowered our GDP, inflation, equity, and interest rate targets for year-end 2019.

Q: How much volatility is normal?

Aside from the extreme volatility during the fourth quarter of 2018, what gets lost on investors is that volatility levels are only now returning to their normal long-term averages. Consider this: For nearly 10 years of the current recovery cycle, volatility has in fact remained well below the long-term averages across most asset classes. So returning to historically normal levels feels sharp for investors who have grown accustomed to low volatility. For context, markets behaved similarly in 2011 and 2015 during this expansion cycle. We believe most of the recent market angst has revolved around uncertainty about economic and earnings growth, a larger-than-normal number of building geopolitical risks, and heightened concerns about higher interest rates.

Q: What are some actions that would restore investor confidence in the markets?

Investors are awaiting further clarity on a number of macro events, including trade between the U.S. and China, Brexit, the Federal Reserve’s future plans for interest rates, and confirmation from economic data that earnings growth will remain solid. Overall, the market fundamentals remain strong, and we believe investors were underappreciating the health of the economy during the fourth quarter selloff in 2018.

Q: What is the relationship between consumer and business spending and the markets?

Consumer and business spending is the lifeblood of the U.S. economy. Consumers make up approximately 70 percent of the economy, so as the consumer goes, so does economic growth. In 2018, both consumer confidence and business confidence hit new highs for this recovery cycle. We expect 2019 to be another year of solid consumer and business spending as higher wages, high employment levels, low oil and gasoline prices, and a tailwind from tax reform benefiting both groups provides ample cash to bolster spending.

Q: What’s the outlook for oil and gas prices?

Our investment strategy team believes that the gas and oil prices we saw in December 2018 were the near-term lows. Nationally, the average price per gallon of gas dropped by more than $0.60 from October 2018 — giving consumers what amounted to more than a $70 billion “energy tax cut” by year-end. We see oil prices rising in 2019 as supply and demand become more balanced. Our year-end 2019 target for West Texas Intermediate Crude Oil is $60-70 a barrel.

Q: How can investors best position themselves for the future?

We believe investors should continue to focus on having a financial plan, keeping it up to date, and making sure the plan is on track to meet their financial needs. Our research suggests that investors with a detailed financial plan are more likely to reach their financial goals, have greater confidence in their financial future, and make far fewer mistakes managing their portfolios during times of heightened market volatility. The value of working with a skilled team of financial experts cannot be understated when it comes to financial health and security. 

Q: Should investors nearing retirement focus more on fixed-income investments?

We believe fixed income plays an important role in the portfolios of clients nearing retirement. It can provide income, help diversify assets, and smooth volatility. The Federal Reserve has raised interest rates nine times since the end of 2015, and we believe fixed income is becoming more attractive after years of low interest rates.

Q: What about investors who are just beginning, or in the middle of, their careers?

While those workers typically have longer to invest and can take on more risk by having a higher allocation in equities, they can also include some fixed income in their portfolio. Although traditional fixed income can be thought of as a risk-averse investment, there are many subsectors of fixed income that can enhance risk in a way that provides a steady stream of income. Fixed-income investments — like high yield, emerging market debt, preferred securities (which have characteristics of stocks and bonds), and even longer maturity fixed-income investments — all have higher income streams because they have enhanced risks associated with them. We believe that both emerging market debt and preferreds offer a favorable opportunity for those investors with a longer time horizon.

Q: Should investors hold cash as an asset? If so, how much is enough?

Cash can be a valuable asset during heightened market volatility. Cash is finally paying investors a decent return once again for the first time in more than a decade, so holding some cash in your portfolio to meet short-term needs is wise. While it can vary from investor to investor, we generally recommend 3-5 percent of a portfolio allocation can be held in cash. However, it’s important to remember that holding too much cash over intermediate- to long-term time horizons can be costly. Cash returns are currently very close to the current rate of inflation, allowing investors to basically break even.

Q: Can market volatility — frequently portrayed as bad — actually be good for investors?

Market volatility certainly doesn’t feel very good for most people, especially those looking at their retirement balances. The key is to not overreact or make emotional decisions when volatility spikes, but rather, to use it to your advantage. Volatility can be good, as it often allows markets to reset excesses, creates attractive entry points and buying opportunities, and allows investors to rebalance their portfolios and assets and make any necessary changes so they continue to track toward their long-term goals.

Orange box with white lettering that reads 4 tips for investing in volatile markets

Match your investments to your time horizon.
Align your investments with your financial calendar. Those who may be planning to retire soon or who need money for emergencies might consider cash and short-term bonds. Investors who are a long way from retirement might give equities or longer-term bonds a look; these options bring more risk but offer potentially better returns over time.
Don’t overreact to news.
The U.S. news tends to focus most on large U.S. company stocks, a small part of the overall investment. If your portfolio is properly diversified, it probably won’t rise and fall as much as these stocks. Your portfolio changes are probably much more moderate.
Regularly revisit your asset plan and diversify.
Since there’s no such thing as a set-it-and-forget-it investment strategy, check and diversify your investment plan when your life changes or the market moves. You can potentially help your money grow and reduce losses by spreading your assets among a variety of investments — and help manage emotions and changing circumstances.
Take advantage of volatility.
If you have cash to invest, consider buying securities and other assets during times of volatility, when they are often on sale.


Different investments offer different levels of potential return and market risk. 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. Stock markets, especially foreign markets, are volatile.  Stock values 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. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. 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.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns. Diversification does not guarantee profit or protect against loss in declining markets.

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 information in this report was prepared by WFII. Opinions represent WFII’s 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. WFII does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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 report 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 this report 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 Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker dealer and non-bank affiliate of Wells Fargo & Company.

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Contributors: Wayne Thompson and Christopher Frers