Wells Fargo Investment Institute (WFII) today released its 2022 Midyear Outlook: Faster, Further, and Fragile. WFII anticipates that while the economic cycle runs faster and the interest rate increases run further, the economy and capital markets will remain fragile. WFII believes the U.S. economy is signaling a mild recession for the end of 2022 and into early 2023. If inflation and monetary tightening ease in 2023, as WFII anticipates, a nascent economic recovery that markets may project into 2024 is expected. The report examines and identifies where it may pay investors to take risks — and what investment opportunities may arise — as they navigate these challenging times.
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Wells Fargo Investment Institute 2022 Midyear Outlook (Photo: Wells Fargo)
“Thus far, 2022 has been trying for investors, with negative year to date returns for both equities and bonds,” said Darrell Cronk, chief investment officer for Wealth & Investment Management. “As we look into the second half of the year, important risks remain. WFII views risk not strictly as an unknown but as something to measure, and as part of a disciplined decision process to manage within a portfolio.”
The report provides WFII’s economic and market forecasts, as well as the outlook and preferred areas of investment for each of the following asset groups:
- Global equities: Slowing earnings per share (EPS) growth will be met with declining valuations, but will likely generate moderate year-end 2022 equity price gains from current levels. For 2023, expect a recession to shrink EPS, but market expectations for recovery later in 2023 should lift valuations and equity markets by year-end. We favor U.S. large-cap and U.S. mid-cap equities over international equities and favor quality among equity sectors.
- Global fixed income: The Federal Reserve has taken a decidedly more aggressive approach toward monetary policy, even as the window of opportunity to engineer an economic soft landing narrows. WFII prefers short-term and intermediate-term investment-grade maturities while interest rates have some room to rise. We prefer not to extend down the credit spectrum into high-yield fixed income.
- Global real assets: Commodities had a strong start to the year, but gains are likely to moderate into year-end before accelerating again in 2023. For yield investors, we favor midstream energy C-corporations, and opportunities may arise in public real estate investment trusts.
- Global alternative investments: Expect Global Macro and Relative Value strategies to provide critical late-cycle diversification and, in the case of Relative Value, incremental income at a time when inflation-adjusted yields remain low. Credit stress is likely to build, which eventually may lead to investment opportunities in Event Driven and Private Debt strategies, which focus on special situations and distressed debt.
WFII’s analysis of current and emerging market conditions leads to the following top five portfolio ideas for the second half of the year:
- Build portfolio resilience with diversifiers.
- Be defensive on equity exposure late in an economic cycle.
- Add to fixed-income holdings judiciously in a rising-rate (and inflationary) environment.
- Match cash allocations to time horizon.
- Seek to mitigate downside risk with alternative investments, including hedge funds.
Investment and Insurance Products are:
• Not Insured by the FDIC or Any Federal Government Agency
• Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
• Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested
Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.
All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful and meet its investment objectives. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss. Each asset class has its own risk and return characteristics, which should be evaluated carefully before making any investment decision. 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. Some of the risks associated with the representative asset classes include: 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 interest rate, 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.
About Wells Fargo Wealth & Investment Management
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company and is one of the largest wealth managers in the U.S., with more than $2 trillion in client assets. WIM provides personalized wealth management, brokerage, financial planning, lending, private banking, trust, and fiduciary products and services to affluent, high-net worth, and ultra-high-net worth clients. WIM operates through advisors in Wells Fargo Advisors, independent brokerage offices, and digitally through Intuitive Investor and WellsTrade, as well as through advisors in The Private Bank and other banking centers.
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.
About Wells Fargo
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