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Investing in post-pandemic markets

The new landscape

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What happens next?

COVID-19, the markets, and your investments:

The pandemic accelerated certain market trends that were already underway prior to the outbreak—while sparking new ones.

If the economy recovers as we expect, we anticipate a convergence of investment trends that we did not observe after the 2008 – 2009 financial crisis. Massive liquidity and private spending, mixed with the broad impacts of a low (but rising) interest rate environment and ongoing market volatility, mean investors have a lot to consider.

Watch the video for more.

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Exploring the new landscape

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Video Transcript

The new landscape: Investing in post-pandemic markets

Presenter: Veronica Willis, Investment Strategy Analyst, Wells Fargo Investment Institute

Investment and Insurance Products:

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Empty office workspaces like these are just one of the signs COVID-19 has upended our daily lives.

Working from home, as well as trends such as teleconferencing, telemedicine, and contactless payments, likely will have broader economic implications for the labor market, consumer behavior, health care, education, travel, and real estate for years to come.

Our response to the pandemic has reshaped the economy and global markets — accelerating certain market trends that were in place prior to the outbreak — and sparking new ones.

Monetary and fiscal policies have also had an impact. These policies have injected an unprecedented amount of liquidity into the global economy, and we believe some of these policies will remain in place until late 2021 or even, possibly, into 2022.

This fiscal stimulus has allowed firms to borrow low-cost capital. This allows for major investments in innovations, such as cloud computing, artificial intelligence, and machine learning in order to improve operations, expand online customer service, and reconfigure global supply chains.

The combination of massive liquidity and private spending on big-ticket items is leading to a rotation in equity markets. There is a shift away from growth and high-quality stocks that historically have characterized late-cycle markets, into a typical early-cycle recovery led by small-cap stocks, cyclical equity sectors, and emerging markets.

Furthermore, in this lower interest rate environment, we believe bonds will continue to struggle. Yet, pent-up demand makes us favorable on commodity investments over the coming 6–12 months.

Despite the many pandemic-related changes in the economy, not all of the recent trends will be permanent ones. For example, we think working from home likely will evolve from its current form to a hybrid model.

To learn more about which trends we believe will be the most impactful and what investors should consider in an effort to take advantage of opportunities, download our special report: “The new landscape: Investing in post-pandemic markets.”


Risk considerations
Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

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. 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 market, interest rate, price, 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. 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.

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.

General disclosures

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.

© 2021 Wells Fargo Investment Institute. All rights reserved. CAR-0321-00346

How might investors find benefits in these trends?

1
The digitization of the economy is accelerating

Monetary stimulus helped companies further develop information technology infrastructure, which is accelerating the digitization of the economy.

The pandemic accelerated technology trends that were already in place, but that will have broad and long-lasting economic implications, including:

  • A greater shift to ecommerce
  • A transition of online entertainment from cable to streaming services
  • Adoption of machine learning and artificial intelligence
  • Wider acceptance of disruptive workplace trends such as teleconferencing/remote work

Learn more about changes in equity leadership.

Sources: Wells Fargo Investment Institute and Capgemini Financial Services Analysis, World Payments Report 2020.
View text alternative

This chart measures the difference in e-commerce spending by customers before the pandemic, during the pandemic, and following the pandemic. It compares customers whose monthly spending was less than 50% on e-commerce and more than 50% on e-commerce. Pre-pandemic spending was divided 76% brick and mortar, 24% e-commerce. During pandemic spending was divided 53% brick and mortar, 47% e-commerce. Post-pandemic spending was divided 54% brick and mortar, 46% e-commerce. It was measured by taking a survey of 8,604 participants through Capgemini’sVoice of Customer Survey.

2
Bond market returns continue to be tempered

During the pandemic, interest rates teetered near all-time lows, and many global bond yields marched further into negative territory. We believe global rates will remain low, but the U.S. may see a greater recovery in interest rates.

What does this mean?

  • Investors should not be tempted to diversify entirely away from bonds.
  • We believe the bond market’s diversification value will continue to make fixed-income assets an important part of a balanced investment portfolio.

Learn more about the future of fixed-income markets.

Sources: Morningstar Direct and Wells Fargo Investment Institute, monthly flow data from January 1, 1993, to December 31, 2020. Flows include U.S. open-end funds, exchange-traded funds, and money markets, excluding funds of funds.
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This chart shows the cumulative net assets flows for U.S. equities, U.S. fixed income, and U.S. money markets as a whole from 1993 to 2020. The chart highlights that investors have allocated heavily towards cash during recessions, but rotated into risk assets once a recovery was in sight.

3
Is a new commodities bull emerging?

In April 2020, oil prices went negative for the first time ever, likely signifying a washout event for commodity prices that could signal the start of a new commodities bull market.

The pandemic caused an unprecedented disruption to the global economy, a historic drop in commodity demand and a washout event in prices. This may have created the catalyst needed to spark a new commodity bull supercycle. Key to whether the bull finds its legs will be how supply responds.

What to know:

  • We currently favor commodities. Evidence is growing that the commodity run could extend well into the coming years

Learn about the full implications for commodities.

Have commodity prices reached an inflection point?

Recent strength in commodity prices could reflect a short-term bounce off the March 2020 bottom, or it could signal the beginning of a new commodity bull super-cycle.

Sources: Bloomberg, Prices by G.F. Warren and F.A. Pearson, Bureau of Labor Statistics, Bureau of Economic Research, and Wells Fargo Investment Institute. Monthly data from January 31, 1800 to December 31, 2020. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Please see the end of this report for index definitions and description of asset-class risks.
View text alternative

This highlights the performance of the commodity composite going back to the 1800s. The chart highlights periods where the commodity composite weathered bear super cycles, and how the recent bounce off the March 2020 bottom could signal the start of a new commodity bull super cycle.

4
Mergers and acquisitions continue to rebound

By mid-2020, global mergers and acquisitions activity had tumbled to its lowest level in more than a decade. However, merger and acquisition (M&A) activity has since recovered to pre-pandemic levels, while Special Purpose Acquisition Company (SPAC) initial public offering (IPO) issuance has surged.

In our view, the growing amount of optimism and deal-making suggests the trend will continue. The tremendous amount of debt issued during the pandemic will need to be deployed, with corporate deals a likely avenue.

What it means:

  • If M&A volume increases over the next year as we expect, both merger arbitrage and activist managers should benefit.

Learn more about alternative investments and how elements of active investing are making a comeback.

Sources: Bloomberg and Wells Fargo Investment Institute, monthly data from December 1, 2018, to December 30, 2020
View text alternative

This chart shows the Global M&A volume on a monthly basis going back to December 2018 along with a two-year average. Beginning in September 2020, M&A activity returned to pre-pandemic levels, and the growing amount of deal-making suggest the trend could continue.

Want to know more? Download the full report.

The full report from Wells Fargo Investment Institute offers more guidance for investing in an altered world, including:

  • • Implications for international investments

     

  • • How investors should position their portfolios

     

  • • Behavioral finance risks in a post-pandemic world

     

  • • Advice for small businesses

     

  • Download the full report (PDF)

     

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Definitions

The Commodity Composite measures a basket of commodity prices as well as inflation. It blends the historical commodity index from George F. Warren and Frank A. Pearson; the U.S. Bureau of Labor Statistics Producer Price Index for Commodities; the National Bureau of Economic Research Index of Wholesale Prices of 15 Commodities; and the Thomson Reuters Equal Weight Commodity Index.

An index is unmanaged and not available for direct investment.

Risk considerations

All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics. 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. 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.

Disclosures

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.

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.

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.

© 2021 Wells Fargo Investment Institute. All rights reserved. CAR 0321-01839

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  • Video: What happens next?
  • Trend: Digitization continuing
  • Trend: Bond markets remaining tempered
  • Trend: Commodities rebounding
  • Trend: M&A accelerating
  • Download the full report (PDF)
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  • Home
  • Video: What happens next?
  • Trend: Digitization continuing
  • Trend: Bond markets remaining tempered
  • Trend: Commodities rebounding
  • Trend: M&A accelerating
  • Download the full report (PDF)
Download the full report (PDF)
Download the full report (PDF)