2018 Outlook

Video Transcript

Positive global economic growth and stronger investor sentiment have helped fuel equity market gains worldwide in 2017. And, as inflation slowly builds and central banks around the world reduce their extraordinary stimulus, fixed-income yields have been rising.

With bond yields and equity returns on the move, many investors are understandably cautious and are asking logical questions. Questions like:

Is the end of the bull market in sight?

This is by far the question we get the most. The economic recovery is maturing.

Now, make no mistake, the later years in an economic expansion can be among the best for returns. But they’re also a time when strong optimism can drive markets ahead of themselves, above and beyond what the underlying fundamentals can support over time.

If rewards are low, why take more risk?

In 2018, we believe investors will be challenged to balance risk and reward. Historically, as economic expansions mature, equity prices tend to rise faster than their fundamentals improve, while exuberance in bond markets can compress yields into ever narrowing credit spreads.

Sentiment can ebb and flow during an expansion, and given our outlook for more modest returns across asset classes in 2018, we now see investors in some markets taking on more risk than we believe is necessary.

It may be tougher today to find investments that either trade below their intrinsic values or that are fundamentally cheap, but we want to encourage vigilance, so that investors are alert to when and where market optimism is detaching prices from their underlying values.

Where are the investment opportunities around the globe?

Well, we believe international equities are earlier in the recovery cycle than U.S. equities, and we see better growth potential in Developed Markets and Emerging Markets than we see in the U.S.

We encourage investors to rebalance their portfolios after 2017’s big U.S. market run-up.

Above all, we recommend that investors stay engaged with their investment plans. Investors usually prioritize returns, but a basic principle of investing is — and should be — to try and limit the losses in their portfolio.

And those losses often come from taking unintended risks. So, our report is really about considering risk and return more closely and maybe in new ways, especially being more global.

For more information on where we see opportunities in 2018 and to learn which investment themes we’re watching in the coming year, download our Wells Fargo Investment Institute 2018 Outlook report titled: Moving Ahead In An Aging Recovery.

Risk Considerations

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 interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

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 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.

© 2017 Wells Fargo Investment Institute. All rights reserved. CAR-1117-00401