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2019 Outlook

The End of Easy

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Investment and Insurance Products: NOT FDIC InsuredNO Bank GuaranteeMAY Lose Value

Selected year-end 2019 forecasts

2.5%

U.S. GDP growth

2.2%

U.S. inflation
Consumer Price Index

2,750-2,850

S&P 500 Index

2.75%-3.00%

Federal funds rate

3.00%-3.50%

10-year U.S. Treasury note yield

$60-$70

West Texas Intermediate
crude oil per barrel

Source: Wells Fargo Investment Institute; January 10, 2019.
Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

View the full report for a complete table of year-end targets for economic and market indices

Opportunities and risks in 2019

The strategists at Wells Fargo Investment Institute share what investors may see in the year ahead.

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5 strategies for investors

1. Lower allocations to the most rate-sensitive assets

Rate-sensitive asset classes and sectors such as REITs and most fixed-income securities, and higher-dividend equity sectors such as Utilities and Materials, may face headwinds from rising rates. However, as this chart shows, equities can still post strong performance late in a cycle when interest rates are rising.

 

Historically, U.S. equities have outperformed bonds while rates are rising

Sources: Morningstar Direct and Wells Fargo Investment Institute, November 19, 2018. For illustrative purposes only. The S&P 500 Index is a market capitalization-weighted index considered representative of the U.S. equity market. The 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. Index returns are not fund returns. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. There is no guarantee any asset class will perform in a similar manner in the future or in other rising rate environments even if it has done so historically. Both stocks and bonds involve risk, and their returns and risk levels can vary depending on prevailing market and economic conditions. Bond prices fluctuate inversely to changes in interest rates.

2. Position for growth in equity markets

We continue to prefer equities over other asset groups and anticipate broader opportunities globally and among U.S. equity sectors.

In U.S. equity markets, we rank opportunities in U.S. large- and mid-cap equities over small-cap equities.

3. Maintain positions in high-quality fixed income

Consider reducing exposure to those securities that are sensitive to rate increases, such as long-duration fixed-income securities and developed market debt. Consider reducing high-yield holdings as well.

We favor shorter-maturity positions while rates are rising.

We expect favorable income-oriented opportunities from emerging market debt and preferred securities.

4. Diversify into international assets*

We believe the dollar will stabilize and even weaken somewhat, providing a potential boost to international assets.

International markets should benefit from steady global growth in 2019.

* Diversification does not guarantee investment returns or eliminate risk of loss.

5. Deploy cash as volatility creates opportunities

Greater market volatility in 2019 signals an end to unprecedented low volatility and above-average returns across equities, fixed income, and currencies.

We favor deploying cash selectively as volatility can create new potential opportunities in commodities and some equity markets.

Economic and investment sector outlook

Can strong economic growth continue?

In the U.S.

We believe U.S. economic growth will moderate and that inflation will remain stable. In our view the likelihood of recession rises beyond 2019.

Greater swings in economic activity, coupled with related to Federal Reserve or trade policy missteps, raise the likelihood of higher financial market volatility.

Around the world

We anticipate somewhat slower growth in Europe as the U.K. prepares for Brexit and Germany’s economy enters the latter stages of its expansion.

Uncertainties surrounding tariffs are a concern for China, yet we expect supportive fiscal and monetary policy to help underpin the country’s economy.

We believe that emerging market economic growth should accelerate, and growth rates in developed economies outside the U.S. should slow toward their long-term trends.

 

Tight U.S. labor market shows lowest initial unemployment claims since May 1973

Tight labor-market conditions finally have ended years of wage stagnation, and employers are finding it difficult to hire qualified workers. Yet, the pace of the U.S. economy may not be so easy to maintain.

Sources: Wells Fargo Investment Institute and Bloomberg, October 31, 2018. Monthly data from January 31, 1967, to October 31, 2018.

Note: The dashed horizontal line shows the October 2018 level of 1.63 million unemployment claims.

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    Greater volatility, but record earnings should create a favorable environment

    We believe the equity markets have room to rise in 2019 due mostly to record-high EPS expected in the coming year.

    The end of easy means, in part, that more historically average volatility has returned to financial markets. However, we believe that investors should not fear the changing trend, so long as low inflation and solid earnings-per-share (EPS) growth continue. See the chart below for more.

    We are most favorable on the Financials and Industrials sectors. We also find attractive opportunities in Consumer Discretionary, Information Technology, and Health Care.

    International equities, especially emerging market equities, look most attractive based on growth and valuation. They also should benefit from marginal U.S. dollar weakness, rising corporate capital expenditures, and growing global industrial production.

     

    Top asset classes for 2019

    • U.S. Large Cap
    • U.S. Mid Cap
    • Emerging Markets

    Top sectors for 2019

    • Consumer Discretionary
    • Financials
    • Health Care
    • Industrials
    • Information Technology

    Favored international region

    • Developed Market Pacific

     

    Record-high expected EPS through 2019 should support current market valuation

    Even if EPS rises more slowly late in a cycle, it can still reach higher levels that, in turn, drive higher equity prices. As shown here, the S&P 500 Index typically rises in proportion to its EPS growth.

    Sources: FactSet and Wells Fargo Investment Institute (WFII), as of October 31, 2018. Quarterly historical data; forward EPS show estimates of EPS over the coming 12 months. The point for December 2018 indicates the EPS expected for year-end 2019. Logarithmic scaling is used so that two equal percent changes have the same vertical distance on each scale.

    Earning per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock and often serves as an indicator of a company’s profitability. The S&P 500 Index is an unmanaged index generally considered representative of the U.S. stock market.

    Monetary policy endings and beginnings

    The Federal Reserve (Fed) will likely end its rate-hike cycle in 2019, but there is a risk that the Fed might take it too far.

    In our opinion, investors should position fixed-income portfolios defensively: taking credit quality higher and being below benchmarks for duration and maturity.

    We favor the emerging market asset class (dollar-denominated sovereign debt) for attractive income opportunities. We expect annualized returns to remain around the 5% to 6% range.

     

    Top asset classes for 2019

    • U.S. Short-Term Taxable Fixed Income
    • Emerging Market Debt

    Top sectors for 2019

    • Preferred Securities
    • Municipal bond sector
      • Taxable Municipal
      • Essential Service Revenue
      • Prerefunded

     

    Yield-curve inversions and the conclusion of rate-hike cycles tend to occur in advance of recessions

    Sources: Bloomberg and Wells Fargo Investment Institute, November 19, 2018. Weekly data from January 08, 1971 to November 16, 2018. For illustrative purposes only.

    An inverted yield curve occurs when the yields on bonds with shorter durations are higher than the yields on bonds with longer durations. The difference between the 10-year and the 1-year Treasury yield measures the spread between short- and long-term interest rates.The Ten-Year Treasury Constant Maturity and the One-Year Treasury Constant Maturity Indexes are published by the Federal Reserve Board and are based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a ten-year maturity and the equivalent of a one-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve.