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Investors remain optimistic despite uncertainty

Brian Rehling of the Wells Fargo Investment Institute discusses investor optimism, rising interest rates, and economic growth.

June 13, 2017

With the latest Wells Fargo/Gallup Investor and Retirement Optimism Index holding steady near its 16-year high, Brian Rehling of Wells Fargo Investment Institute explores rising interest rates and their impact on investors.

Q: While investor optimism held steady near its 16-year high, this is the first quarter since 2016 that the index didn’t increase. Have we reached the peak?

Brian Rehling
Brian Rehling

I don’t think that investor optimism has peaked for this cycle. Typically, investor optimism peaks near or just after economic growth and equity markets peak. We look for the economy to continue to improve and for stocks to hit new highs over the next 12-18 months. That investor optimism did not increase again is likely the realization that the market optimism over President Trump’s election was premature.

Q: How can investors protect themselves and their portfolios in times of uncertainty?

Investors often focus on fears resulting from the current news cycle. While these events do impact day-to-day movements in the markets, they generally don’t have a lasting impact on economic growth. From a fixed-income perspective, one of the bigger threats to investors’ portfolios over the coming months is the Federal Reserve’s ability to get monetary policy right. A monetary policy mistake could lead to a premature end of the expansion or an increase in inflation. Without question, the best way to protect your investments from uncertainty is to own a well-diversified portfolio of both stocks and bonds.

Q: Most investors continue to say they prefer lower interest rates. Are low rates good or bad for investors?

Whether low interest rates are a positive likely depends on an investor’s perspective. Someone heavily invested in stocks would likely prefer a low-rate environment as cheap borrowing can help fuel earnings growth while keeping costs relatively low. For investors in retirement looking to generate income from their portfolio, however, low rates are actually a significant headwind affecting income.

Q: Should we be concerned that debt levels have reached $12.7 trillion, and are low interest rates a factor?

While debt levels have grown, we must remember that the overall economy has grown as well. When looking at debt relative to the economy, levels are more reasonable and not overly concerning for the economy at this time. While low rates help investors feel more comfortable with their debt load, the driving factor in this sentiment is most likely low unemployment and a healthy economy.

Q: What’s your forecast for interest rates?

We look for rates to move modestly higher over the next year as economic growth improves. The Fed is slowly increasing rates, but we must remember that rates are still relatively low. For the longer term, there are many structural headwinds that should help support a low-rate environment including increasing debt, an aging demographic, and low productivity.

Q: With rates slowly rising, what should investors do differently?

While everyone’s situation is different, in general, investors that are just starting out with a long time horizon have the ability to take on more risk and have high allocations to equities. As you near retirement, you generally have less tolerance for volatility and risk, so we see a shift into bonds. In this low-rate environment, some retirees have taken more risk to generate portfolio income than may be appropriate. In these cases, we recommend that clients work with an investment professional to reassess their overall financial plan.

Infographic summarizing the second quarter 2017 results in the Wells Fargo/Gallup Investor and Retirement Optimism Index study

For more investment insights, see the Wells Fargo Investment Institute site on wellsfargo.com.


Risk Factors

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. The prices of small and mid-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Disclaimers

Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company.

Opinions represent WFII’s opinion as of the date of this report and are for general informational 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.

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