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2021 Outlook

Forging a path forward

  • Welcome
  • Video: What to expect in 2021
  • 2021 year-end forecasts
  • Top-five portfolio ideas for 2021
  • 2021 economy and investment insights

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Investment and Insurance Products are: Not insured by the FDIC or any Federal Government AgencyNot a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank AffiliateSubject to Investment Risks, Including Possible Loss of the Principal Amount Invested


Almost always, economic recoveries have arisen from dark points in our history. And investors know well that some of the best investment opportunities often present themselves from non-consensus ideas. These patterns are developing again.

Darrell L. Cronk

President, Wells Fargo Investment Institute

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Video: What to expect in 2021

Paul Christopher, Wells Fargo Investment Institute Head of Global Market Strategy, shares the key points that are influencing the investment outlook for 2021 — and how investors should react.

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Video Transcript

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2021 Outlook

investment and insurance products: not FDIC insured, no bank guarantee, may lose value

Presenter: Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute

2020 had many difficult and unpredictable twists and turns. A widespread global health pandemic, polarized politics, social unrest, unprecedented weather events, and the first economic recession and equity bear market in over a decade — all these challenged investors’ fortitude and left them feeling a little exhausted at year’s end.

Although these pressures may continue to have long-term implications, we see potential investment opportunities in the months ahead, as economic and health care conditions gradually improve, and the recovery gains momentum.

Our 2021 Outlook identifies where we believe investment opportunities may arise.

We anticipate moderate, but uneven global growth in 2021. As the U.S. overcomes its pandemic threat it will remain on the leading edge of the recovery, along with China.

Europe’s economy should gain momentum after a winter surge in COVID infections. And among the emerging economies, China should lead the way, while some others may enjoy strong rebounds. But we think the Latin American economies will lag.

Even with the U.S. on the leading edge of the recovery, we expect further dollar declines, mainly against the euro, as the Federal Reserve adds more monetary stimulus.

In all, a gradually broadening global economic recovery and a weakening dollar should support global asset markets over the course of the year.

In terms of Equities, brightening economic conditions should mean an earnings rebound, and send equity prices to record highs.

We favor U.S. over international equities and the recommended move to quality that we talked about in 2020, carries over to 2021. Additionally, we see some potential opportunities in some traditional cyclical sectors—especially those with higher quality characteristics.

As some uncertainties ease in 2021, we expect moderately higher interest rates, but the economy’s slow pace should prevent a return to historical rate levels.

These historically low rates should add to high demand for yield. We prefer credit and would use active managers in acquiring lower-quality investments. We also favor tax-advantaged municipal bonds, including high-yield municipals.

It’s a mixed bag with real assets. We believe commodities may see a bounce as they experience a rebound in demand.

But, Real Estate Investment Trusts, or REITs, should face headwinds in the coming year as they cope with post-pandemic realities.

And finally, for alternative investments, we believe investors should gravitate toward hedge fund and private capital portfolios that are more focused on themes arising out of the COVID-19 crisis. Often sectors and industries facing the biggest challenges can support the best long-term investment opportunities.

When we think about portfolios, we believe it’s better to be proactive not reactive. So, we favor

  • Holding enough cash for short-term buying and selling, but not more
  • Selectively increasing risk as the economy improves
  • And diversifying income streams

For more ideas on how to be proactive in 2021, please download our Wells Fargo Investment Institute special report — 2021 Outlook: Forging a Path Forward.


Risk Considerations

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. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). Preferreds securities have special risks associated with investing. Preferred securities are subject to interest rate and credit risks. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer’s capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security. 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. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic condition.

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.

Alternative investments, such as hedge funds and private capital, carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. They are complex investment vehicles which generally have high costs and substantial risks. The high expenses often associated with these investments must be offset by trading profits and other income. They tend to be more volatile than other types of investments and present an increased risk of investment loss. There may also be a lack of transparency as to the underlying assets. Other risks may apply as well, depending on the specific investment product.

General disclosures

The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

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 or best interest 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 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.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

© 2020 Wells Fargo Investment Institute. All rights reserved. CAR-1120-02927

 

A letter to investors from Darrell L. Cronk

I was channeling my love for history when I began reading the stories of Hannibal. He was a great commander and tactician of ancient Carthage who commissioned his generals to embrace the impossible and cross the Alps through Italy by elephants to defeat superior Roman forces during the Second Punic War. In perhaps not so dissimilar ways, 2020 felt like navigating treacherous steep mountain paths via pachyderms, with as many difficult and unpredictable twists and turns. To illustrate: This past year brought the most widespread global health pandemic in over 100 years, some of the most polarized politics witnessed yet, social unrest, unprecedented weather events around the globe, and the first economic recession and equity bear market in over a decade. All challenged investors’ fortitude and left them feeling a little exhausted at the year’s end journey.

As we turn the calendar into 2021 and simultaneously exhale (albeit through our masks), serious questions call for clarity and resolution. When can we leave distancing and masks behind us and return to more stable social and economic activity? How will economic priorities and tax policies change under new Washington leadership? Will a growing Wall Street and Main Street disconnect reconcile itself in 2021, and if so, how? Let’s explore:

  • COVID-19 vaccines and therapeutics are coming but will face questions about timing, availability and the impact of possible virus mutations. Markets will quickly and efficiently arbitrate their effect on economic growth, confidence, and consumption. Much will depend upon this critical path in 2021.
  • The postelection picture in Washington could well result in changed policies. A reset of pre-2017 regulation levels (or new ones) for many industries, more limited fiscal spending initiatives, or higher corporate and individual tax rates but a more multilateral approach to international trade policy may be in the offing for 2021. Any changes in policies will be closely monitored by markets for their cascading influence.
  • Wall Street recovered quickly, but many parts of Main Street are struggling to overcome the pandemic’s economic costs. History teaches us that the two often don’t diverge for long periods of time. Therefore, economic policy and priority alignment will be critical to reconciling both onto a similar recovery path this year.

Patience and perseverance have a magical way of encouraging progress. Still, one can be forgiven for feeling fatigued from the challenges of this past year. Almost always, economic recoveries have arisen from dark points in our history, and investors know well that some of the best investment opportunities often present themselves from non-consensus ideas. These patterns are developing again. Our report highlights how these potential investment opportunities may arise in 2021.

On behalf of my Wells Fargo Investment Institute colleagues, I want to thank you for the trust you extend to us as our clients. We look forward to blazing the rugged trail of this recovery with you in 2021 — and beyond. Keep up the good fight.

Darrell L. Cronk, CFA
President, Wells Fargo Investment Institute
Chief Investment Officer, Wealth and Investment Management

A letter to investors from Darrell L. Cronk

I was channeling my love for history when I began reading the stories of Hannibal. He was a great commander and tactician of ancient Carthage who commissioned his generals to embrace the impossible and cross the Alps through Italy by elephants to defeat superior Roman forces during the Second Punic War. In perhaps not so dissimilar ways, 2020 felt like navigating treacherous steep mountain paths via pachyderms, with as many difficult and unpredictable twists and turns. To illustrate: This past year brought the most widespread global health pandemic in over 100 years, some of the most polarized politics witnessed yet, social unrest, unprecedented weather events around the globe, and the first economic recession and equity bear market in over a decade. All challenged investors’ fortitude and left them feeling a little exhausted at the year’s end journey.

As we turn the calendar into 2021 and simultaneously exhale (albeit through our masks), serious questions call for clarity and resolution. When can we leave distancing and masks behind us and return to more stable social and economic activity? How will economic priorities and tax policies change under new Washington leadership? Will a growing Wall Street and Main Street disconnect reconcile itself in 2021, and if so, how? Let’s explore:

  • COVID-19 vaccines and therapeutics are coming but will face questions about timing, availability and the impact of possible virus mutations. Markets will quickly and efficiently arbitrate their effect on economic growth, confidence, and consumption. Much will depend upon this critical path in 2021.
  • The postelection picture in Washington could well result in changed policies. A reset of pre-2017 regulation levels (or new ones) for many industries, more limited fiscal spending initiatives, or higher corporate and individual tax rates but a more multilateral approach to international trade policy may be in the offing for 2021. Any changes in policies will be closely monitored by markets for their cascading influence.
  • Wall Street recovered quickly, but many parts of Main Street are struggling to overcome the pandemic’s economic costs. History teaches us that the two often don’t diverge for long periods of time. Therefore, economic policy and priority alignment will be critical to reconciling both onto a similar recovery path this year.

Patience and perseverance have a magical way of encouraging progress. Still, one can be forgiven for feeling fatigued from the challenges of this past year. Almost always, economic recoveries have arisen from dark points in our history, and investors know well that some of the best investment opportunities often present themselves from non-consensus ideas. These patterns are developing again. Our report highlights how these potential investment opportunities may arise in 2021.

On behalf of my Wells Fargo Investment Institute colleagues, I want to thank you for the trust you extend to us as our clients. We look forward to blazing the rugged trail of this recovery with you in 2021 — and beyond. Keep up the good fight.

Darrell L. Cronk, CFA
President, Wells Fargo Investment Institute
Chief Investment Officer, Wealth and Investment Management

Selected year-end 2021 forecasts

End-November 2020 values and predicted values for 2021

Values as of 11/30/20 2021 year-end target
U.S. GDP growth -3.7% 3.8%
U.S. inflation 1.0% 1.7%
S&P 500 Index 3,622 3,800 – 4,000
Fed funds rate 0.25% 0.00% – 0.25%
10-year Treasury yield 0.84% 1.00% – 1.50%
WTI crude oil (price per barrel) $45 $45 – $55
Source: Wells Fargo Investment Institute, December 7, 2020. GDP = gross domestic product. Forecasts, targets and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. An index is not managed and not available for direct investment. Past performance is no guarantee of future results.

Portfolio implementation

Top-five portfolio ideas for 2021

Click the tabs below to learn more.

  • Hold the right amount of cash
  • Look at risk
  • Consider high-quality sectors
  • Diversify
  • Be proactive
  • Hold the right amount of cash
  • Look at risk
  • Consider high-quality sectors
  • Diversify
  • Be proactive

Hold the right amount of cash

In our view, investors should hold enough cash to meet short-term liquidity needs to avoid selling assets at inopportune times. Investors may be over-allocated to cash, as money market balances remain near all-time highs.

Investors holding high levels of cash likely are missing out on the market recovery and could be impeding long-term performance. Our research also has found that missing the 10 best days in the market over the past 10 years resulted in a decrease in annualized return by over 50% — from 10.7% to 4.3%1.

For portfolios with high levels of cash, we suggest that investors invest the cash thoughtfully. One potential strategy is dollar-cost averaging — investing cash over time in an effort to take advantage of market fluctuations2.

1. Bloomberg and Wells Fargo Investment Institute, as of October 31, 2020. The market is represented by the S&P 500 Index. Analysis based on price return for the S&P 500 Index. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

2. A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider his or her ability to continue purchases through periods of low price levels.

A man sits overlooking a canyon.

Selectively increase risk

As we enter a new bull market, we expect risk assets like equities to outperform. But within equities, we suggest that investors be selective in how they increase risk. We generally favor U.S. equities over international equities because we believe that growth prospects in the U.S. are stronger than those for international economies.

Within U.S. equity asset classes, we prefer large-cap and mid-cap equities over small-cap equities, because larger companies typically have higher cash balances, lower leverage, and better earnings growth than their smaller counterparts.

We also suggest using gold as part of a tactical commodities allocation (2% to 4% of the portfolio) in an effort to hedge risk and provide a level of diversification.

Within fixed income, we favor taking credit risk and keeping duration (interest-rate sensitivity) neutral.

A climber on a mountain peak.

Consider exposure to higher-quality, growth-oriented sectors

We believe that improving economic data and bullish investor sentiment should support equities as the recovery continues into 2021. Yet some equity sectors are better positioned than others to perform well in the type of economic environment we expect.

We favor cyclical sectors that should demonstrate more consistent performance as the U.S. economic recovery advances.

Our favored sectors include:

  • Communication Services
  • Consumer Discretionary
  • Health Care
  • Information Technology
  • Materials
A lake with a forested shoreline.

Diversify income streams

Low rates may rise only slightly in 2021, and we suggest diversifying to seek yield in fixed income investments beyond traditional bond holdings.

We favor adding to credit exposure, but selectivity remains key as the risk of pandemic-related bankruptcies rises during the first half of 2021.

Within fixed income sectors, we favor municipal bonds and investment-grade and high-yield corporates, as we believe those sectors are well positioned to offer yield.

We believe moves down the credit spectrum for the benefit of added yield should be made with caution. Accordingly, we prefer active management in lower-quality investments.

Preferred securities are another yield-oriented fixed income sector that we currently view favorably. Investors purchasing preferred securities may want do so with a buy-and-hold mentality as these securities can become highly volatile during times of market stress.

A meandering river.

Be proactive, not reactive

Investors tend to exhibit certain cognitive and emotional behavioral biases that can lead to unwise decisions. In periods of high volatility, we suggest taking action thoughtfully and not reacting emotionally.

The chart below compares four hypothetical investor reactions after the bear market was officially announced on March 11, 2020. The first investor increased equity exposure (added 30% more to equities, taken from investment grade fixed income), the second one decreased equities (half of the equity exposure redistributed to cash and investment grade fixed income), the third one completely exited equities, while the fourth investor maintained strategic allocations through rebalancing. In this example, the portfolios with increased equity exposure outperformed, while those who decreased equity holdings underperformed.

The wrong reaction to negative news can be costly

Investors who increased their allocation to equities or rebalanced quarterly outperformed investors who removed or reduced their allocation to equities.

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This chart shows how the return for a hypothetical moderate growth and income portfolio from January 2020 to November 2020 varied depending on how the equity allocation was adjusted on March 11, 2020, in response to the COVID-19 pandemic. A hypothetical portfolio that increased equity exposure (added 30% more to equities, taken from investment-grade fixed income) returned 14.68%. A hypothetical portfolio that maintained strategic allocations through quarterly rebalancing returned 10.22%. A hypothetical portfolio that decreased equities (half of the equity exposure redistributed to cash and investment-grade fixed income) returned 2.03%. A hypothetical portfolio that completely exited equities returned -6.00%.

Source: ©2020 – Morningstar Direct1 and Wells Fargo Investment Institute, as of November 23, 2020. MGI = Moderate Growth & Income. Performance results for the portfolios are hypothetical and are presented for illustrative purposes only. Hypothetical results do not represent actual trading. An index is unmanaged and not available for direct investment. Hypothetical and past performance do not guarantee future results. Please see end of page for important definitions and disclosures including portfolio compositions, index definitions, and risks associated with the representative asset classes.

Find more guidance in the full report

Download the 2021 Outlook report (PDF)

2021 economy and investment insights

Economy

A bumpy transition year in 2021

The year ahead

  • We expect the pandemic’s lingering fallout to sustain uneven global economic growth, accompanied by firmer, but sub-2% inflation for most of 2021.
  • We expect aggressive Federal Reserve stimulus to fuel dollar depreciation, mostly against the euro. However, the global growth recovery and less pressure on global trade also should stabilize emerging market currency exchange values.

What it may mean for investors

  • We believe ongoing recovery from the upheaval of the past year should provide a supportive backdrop for asset markets in 2021.
  • Moderate economic growth and subdued inflation are consistent with adequate earnings growth and historically low interest rates, favoring gains in stocks and limiting the threat to bonds.
  • In our opinion, dollar weakness against the euro should help ease global deflationary pressures while boosting dollar-denominated returns on European investments.

Risks

  • We believe the most visible risks to our 2021 growth outlook are pandemic-containment efforts that are stringent enough to reverse the recovery, leading to a double-dip recession. Other growth hurdles could come from an end to rental forbearance and other credit-quality issues at the same time that government spending pulls back.
  • Europe’s worsening economic slowdown, increased monetary stimulus by the European Central Bank, and “flight-to-quality” support for the dollar in more turbulent market conditions could upend forecasts of dollar weakness relative to the euro, in our opinion.

The U.S. and China are running neck and neck in the global growth derby

Although the U.S. and China show signs of recovering from the pandemic-related contraction, Eurozone economic activity remains depressed.

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The U.S. and China are running neck and neck in the global growth derby

Although the U.S. and China show signs of recovering from the pandemic-related contraction, Eurozone economic activity remains depressed.

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The U.S. and China are running neck and neck in the global growth derby

Although the U.S. and China show signs of recovering from the pandemic-related contraction, Eurozone economic activity remains depressed.

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This chart shows companies in the U.S, China, and the Eurozone reporting increased manufacturing and nonmanufacturing activity from December 2019 through October 2020. A measure above 50 shows expansion; a measure below 50 shows contraction. All three regions showed a sharp contraction in spring 2020 due to COVID-19. The U.S. and China have recovered better than the Eurozone which showed a much steeper decline. The U.S. measured 53.4 in December 2019, 34.4 in April 2020, and 56.6 in October 2020. China measured 52.6 in December 2019, 32.7 in February 2020, and 54.9 in October 2020. The Eurozone measured 50.9 in December 2019, 13.6 in April 2020, and 49.4 in October 2020.

Markit, Inc.; Bloomberg Financial News, Inc.; and Wells Fargo Investment Institute, November 18, 2020.
*Percent of respondents reporting increased manufacturing & non-manufacturing activity.
Equities

Improving growth should support equities

The year ahead

  • We expect corporate earnings to rebound in 2021, with U.S. and emerging market benchmarks surpassing pre-recession levels.
  • We believe higher-quality U.S. equity asset classes and sectors still should produce positive returns. Emerging markets and select U.S. cyclical sectors could outperform the S&P 500 Index as the recovery takes hold.

What it may mean for investors

  • We believe investors should consider leaning into U.S. large- and mid-cap equities, while bringing allocations to U.S. small-cap equities and emerging market equities up to strategic target weights.

Risks

  • A new surge in COVID-19 infections or disappointment about lack of progress on a vaccine could restrain the recovery and create new uncertainties about earnings-per-share growth.
  • Policy uncertainty resulting from a divided U.S. government could lead to a lack of compromise and an inability to pass economic and market-friendly legislation.

We expect earnings per share to surpass prerecession highs

We expect global earnings improvement as the recovery from the 2020 lockdowns becomes more steady.

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This chart shows actual earnings per share for 2019 and estimated earnings per share for 2020 and 2021 for the S&P 500 Index, Russell Midcap Index, Russell 2000 Index, MSCI EAFE Index, and MSCI Emerging Markets Index. Earnings for 2019: S&P 500 Index, 163.0; Russell Midcap Index, 113.8; Russell 2000 Index, 57.4; MSCI EAFE Index, 132.0; and MSCI Emerging Markets Index, 74.1. Estimated earnings for 2020: S&P 500 Index, 130.0; Russell Midcap Index, 70.0; Russell 2000 Index, 20.0; MSCI EAFE Index, 85.0; and MSCI Emerging Markets Index, 55.0. Estimated earnings for 2020: S&P 500 Index, 175.0; Russell Midcap Index, 120.0; Russell 2000 Index, 65.0; MSCI EAFE Index, 115.0; and MSCI Emerging Markets Index, 80.0.

Sources: Bloomberg and Wells Fargo Investment Institute, as of November 23, 2020. 2019 EPS actual. 2020 and 2021 EPS based on WFII forecasts. EPS = earnings per share. EM = Emerging Markets. Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
Fixed income

Low yields persist on road to recovery

The year ahead

  • An extended low-rate environment will likely add to already high demand for yield-oriented product.
  • Tax-exempt income is likely to be in high demand. We believe investors should look for opportunities to add municipal bond allocations in taxable accounts.

What it may mean for investors

  • As uncertainties fade, we believe investors should look for opportunities in higher-yielding fixed income investments, while taking care to avoid being overly conservative in fixed income positioning.

Risks

  • Although not our base case, we believe a highly effective vaccine would allow a faster-than-expected recovery. Such a robust recovery, coupled with the significant stimulus already in the economy, could produce higher-than-expected interest rates and risk assets could rally.
  • Should policymakers have to respond to a continued or new crisis, we have some concern that limited fiscal flexibility and novel policy tools would be less effective in the future given their extensive use over the past year.

We expect yields across the curve to stay low

We believe the Fed will keep the federal funds rate — and therefore short-term interest rates — at current levels. However, we expect longer-term yields to rise modestly as economic recovery takes hold.

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This chart shows yield curves for November 2019, November 2020 and Wells Fargo Investment Institute’s estimate for year-end 2021. Yield for 3-month Treasuries: 2019, 1.58%; 2020, 0.66%; 2021, 0.11%. Yield for 1-year Treasuries: 2019, 1.55%; 2020, 0.10%; 2021, 0.20%. Yield for 5-year Treasuries: 2019, 1.62%; 2020, 0.38%; 2021, 0.67%. Yield for 10-year Treasuries: 2019, 1.77%; 2020, 0.85%; 2021, 1.25%. Yield for 30-year Treasuries: 2019, 2.22%; 2020, 1.56%; 2021, 2.00%.

Sources: Bloomberg, Wells Fargo Investment Institute. Weekly data as of November 23, 2020. Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results.
Real assets

Commodity bounce likely to continue

The year ahead

  • We believe a rebound in economic growth and likely COVID-19 vaccines and therapeutics should support commodity demand in 2021.
  • Lingering real estate impacts should weigh on real estate investment trusts (REITs) overall, while the divergence between the REIT “haves” and “have nots” continues to widen.

What it may mean for investors

  • We expect commodities to perform well in 2021. We believe REIT investors should be selective.

Risks

  • Policy missteps or a resurgence in COVID-19 cases could depress economic growth and confidence in 2021.
  • A slowdown in Chinese economic growth could lead to reduced demand for commodities.

Gold versus 10-year Treasury Inflation Protected Securities (TIPS)

Because gold and TIPS are both used as potential inflation hedges, gold prices have generally risen as inflation-adjusted Treasury yields have fallen. Negative real interest rates could continue to support gold prices in 2021.

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This chart shows the price of gold per ounce versus the yield for 10-year Treasury Inflation-Protected Securities (TIPS) from January 2016 through November 2020. Gold prices have generally risen as inflation-adjusted Treasury yields, also known as TIPS, have fallen. January 2016, gold $1,061 per ounce; TIPS 0.71%. January 2017, gold $1,172 per ounce; TIPS 0.44%. January 2018, gold $1,320 per ounce; TIPS 0.44%. January 2019, gold $1,286 per ounce; TIPS 0.91%. January 2020, gold $1,552 per ounce; TIPS 0.01%. November 2020, gold $1,870 per ounce; TIPS -0.88%.

Sources: Bloomberg, Wells Fargo Investment Institute, November 23, 2020. Weekly data: January 1, 2016 – November 23, 2020. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results.

Alternative investments

Postpandemic themes may provide opportunities

The year ahead

  • Our expectations for additional bankruptcies and defaults in 2021 should support relative value hedge fund strategies focused on structured credit, long/short credit, and event driven managers focused on distressed debt.
  • As pandemic-related weakness remains selective, fundamental, bottom-up stock selection offers potential opportunities, and we maintain our favorable view on equity hedge.
  • Though core strategies dominate private real estate assets, we view value-add and opportunistic (particularly in industrial and multifamily assets) as the private real estate strategies best positioned for 2021.

What it may mean for investors

  • We believe investors should gravitate toward hedge fund and private capital portfolios that are more focused on themes arising out of the COVID-19 crisis. Often sectors and industries facing the biggest challenges also elicit the best long-term investment opportunities.

Risks

  • A faster-than-expected return to “normal” could lead to further core real estate price appreciation and truncate the opportunity set for value add and opportunistic strategies.
  • A double-dip recession could put pricing pressure on 2020- and early 2021-vintage portfolios.

Performance of value-add and opportunistic North American Private Real Estate funds

Value-add and opportunistic North American Private Real Estate funds that started investing in the 2001 and 2007-2009 recessions delivered higher returns compared to other vintages.

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This chart shows the net internal rate of return for value-add and opportunistic North American Private Real Estate funds from 2000 to 2018. 2000, 14.4%; 2001, 23.3%; 2002, 19.6%; 2003, 13.1%; 2004, 6.8%; 2005, 0.3%; 2006, 0.2%; 2007, 5.6%; 2008, 7.8%; 2009, 13.8%; 2010, 14.0%; 2011, 15.6%; 2012, 14.2%; 2013, 11.3%; 2014, 12.2%; 2015, 9.9%; 2016, 8.5%; 2017, 3.9%; 2018, 1.9%.

Sources: Burgiss, National Bureau of Economic Research, and Wells Fargo Investment Institute. Data as of second quarter 2020. IRR is internal rate of return, which is the average annual return that investors realized over time from an investment of a particular vintage. Funds are pooled IRRs calculated with 457 funds categorized as value-add or opportunistic private real estate focusing on North America. Past performance is not a guarantee of future results.

Alternative investments are not suitable for all investors and are only open to “accredited investors” or “qualified investors” within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and designed for long-term investment and not as trading vehicles.

Download the full report for more

The full report, 2021 Outlook: Forging a path forward, includes additional insight from Wells Fargo Investment Institute that can help investors make informed decisions in the year ahead.

The report includes favored sectors and the full economic and investment forecast for 2021.

For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.

 

View the full report (PDF)

Cover of the 2021 Outlook report PDF.

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Hypothetical Portfolio Compositions

Moderate Growth and Income: 3% Bloomberg Barclays U.S. Treasury Bill (1–3 Month) Index, 32% Bloomberg Barclays U.S. Aggregate Bond Index, 6% Bloomberg Barclays U.S. Corporate High Yield Bond Index, 5% JPM EMBI Global Index, 21% S&P 500 Index, 12% Russell Midcap Index, 8% Russell 2000 Index, 6% MSCI EAFE Index, 7% MSCI Emerging Markets Index.

Moderate Growth and Income (increasing equity allocation): 2% Bloomberg Barclays U.S. Treasury Bill (1–3 Month) Index, 16.8% Bloomberg Barclays U.S. Aggregate Bond Index, 6% Bloomberg Barclays U.S. Corporate High Yield Bond Index, 5% JPM EMBI Global Index, 27.3% S&P 500 Index, 15.6% Russell Midcap Index, 10.4% Russell 2000 Index, 7.8% MSCI EAFE Index, 9.1% MSCI Emerging Markets Index.

Moderate Growth and Income (reducing equity allocation): 16.5% Bloomberg Barclays U.S. Treasury Bill (1–3 Month) Index, 45.5% Bloomberg Barclays U.S. Aggregate Bond Index, 6% Bloomberg Barclays U.S. Corporate High Yield Bond Index, 5% JPM EMBI Global Index, 10.5% S&P 500 Index, 6% Russell Midcap Index, 4% Russell 2000 Index, 3% MSCI EAFE Index, 3.5% MSCI Emerging Markets Index.

Moderate Growth and Income (removing equity allocation): 30% Bloomberg Barclays U.S. Treasury Bill (1–3 Month) Index, 59% Bloomberg Barclays U.S. Aggregate Bond Index, 6% Bloomberg Barclays U.S. Corporate High Yield Bond Index, 5% JPM EMBI Global Index.

Index definitions

Bloomberg Barclays U.S. Treasury Bill (1–3 Month) Index is representative of money markets.

Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.

Bloomberg Barclays U.S. Corporate High Yield Bond Index covers the universe of fixed-rate, noninvestment-grade debt.

JPM EMBI Global Index covers 27 emerging market countries. Included in the EMBI Global are U.S.-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.

The MSCI EAFE Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

The MSCI Emerging Markets Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure equity market performance of emerging markets.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

The S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market.

Risk considerations

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:

General market risks

Stock markets, especially foreign markets, are volatile. A stock’s value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. International investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. Investing in small- and mid-cap companies involves additional risks, such as limited liquidity and greater volatility.

Investments in fixed-income securities, including municipal securities, are subject to market, interest rate, credit, liquidity, inflation, prepayment, extension, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in a decline in the bond’s price. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. Municipal securities may also be subject to the alternative minimum tax and legislative and regulatory risk, which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk, especially when real interest rates rise. This may cause the underlying value of the bond to fluctuate more than other fixed income securities. TIPS have special tax consequences, generating phantom income on the “inflation compensation” component of the principal. A holder of TIPS may be required to report this income annually although no income related to “inflation compensation” is received until maturity. 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.

Similar to bonds, preferred securities are interest rate sensitive. Their dividends are not guaranteed and are subject to change. Some preferred securities include a call provision, which may negatively affect the return of the security. A prerefunded bond is a callable bond collateralized by high-quality securities, typically Treasury issues. U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest if held to maturity. Although free from credit risk, they are subject to interest rate risk.

Sector investing

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 Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues. Risks associated with the Information 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.

Alternative investments

Alternative investments, such as hedge funds, private equity/private debt, and private real estate funds, are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, and less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt, and private real estate fund investing involve other material risks, including capital loss and the loss of the entire amount invested. A fund’s offering documents should be carefully reviewed prior to investing.

Private debt strategies seek to actively improve the capital structure of a company, often through debt restructuring and deleveraging measures. Such investments are subject to potential default, limited liquidity, the creditworthiness of the private company, and the infrequent availability of independent credit ratings for private companies. Investing in distressed companies is speculative and involves a high degree of risk. Because of their distressed situation, these securities may be illiquid, have low trading volumes, and be subject to substantial interest rate and credit risks. Private capital investments are complex, speculative investment vehicles not suitable for all investors. They are not subject to the same regulatory requirements as registered investment products and engage in leverage and other aggressive investment practices. There is often limited (or even nonexistent) liquidity and a lack of transparency regarding the underlying assets.

Hedge fund strategies, such as Event Driven, Equity Hedge, Relative Value, Structured Credit, and Long/Short Credit, may expose investors to the risks associated with the use of short selling, leverage, derivatives, and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential because the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage, which can magnify volatility and may entail other risks, such as market, interest rate, credit, counterparty, and management risks. Private capital investments are complex, speculative investment vehicles not suitable for all investors. They are not subject to the same regulatory requirements as registered investment products and engage in leverage and other aggressive investment practices. There is often limited (or even nonexistent) liquidity and a lack of transparency regarding the underlying assets.

Real assets

Real assets are subject to the risks associated with real estate, commodities, and other investments and may not be suitable for all investors.

The commodities markets, including investments in gold and other precious metals, 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. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies, which may expose investors to additional risks. Investment in real estate securities includes risks, such as the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

General disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII 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 the Global Investment Strategy (GIS) division of WFII. Opinions represent GIS’ opinion as of the date of this report; 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. GIS 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 or best interest 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.

1All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Wells Fargo Wealth and Investment Management, a division within the Wells Fargo & Company enterprise, provides financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Brokerage products and services offered through Wells Fargo Clearing Services, LLC, a registered broker-dealer and nonbank affiliate of Wells Fargo & Company. Bank products are offered through Wells Fargo Bank, N.A.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services accounts with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions, or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and nonbank affiliates of Wells Fargo & Company.

© 2020 Wells Fargo Investment Institute. All rights reserved. CAR-1220-00242

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  • Welcome
  • Video: What to expect in 2021
  • 2021 forecasts
  • Top-five portfolio ideas for 2021
  • 2021 economy and investment insights
  • Download the full report (PDF)