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Investment Institute

2021 Midyear Outlook

Fuel for growth

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On the rise

The recovery picks up speed

The economy is running faster than most of us have seen in our lifetimes, and that’s an important feature of our investment outlook.

In the first half of 2021, we witnessed remarkable economic recovery thanks to the increasing distribution of COVID-19 vaccines, increased private savings, low interest rates, and government stimulus. These factors are still providing fuel for growth that we believe should intensify the 2021-2022 economic recovery to its fastest two-year pace since 1965-1966.

What could that mean for markets, and for investors seeking opportunity for growth?


Five post-pandemic ideas for your portfolio

Put cash to work selectively

Against the backdrop of a vigorous economic recovery, we favor equities over fixed income. We prefer U.S. Large Cap Equities and U.S. Small Cap Equities and favor Emerging Market Equities over Developed Market ex-U.S. Equities. We favor allocating cash thoughtfully, particularly as investors’ cash holdings have increased significantly since 2007 (see the chart). One potential strategy: dollar-cost averaging.

Dollar-cost averaging involves making investments at set intervals over time to take advantage of market fluctuations and make investing less emotional. It does not guarantee a profit or protect portfolios from losses, it simply focuses on asset accumulation in a systemic way to avoid the guesswork.

Large amounts of cash alternatives on the sidelines may present an opportunity for investors

Sources: Wells Fargo Investment Institute and Morningstar Direct, as of April 30, 2021

This chart illustrates the flow of assets under management (AUM) within money market funds from January 1, 2007 to April 30, 2021. Assets within money market funds are near record highs, with current levels at $3.8 trillion in AUM as of April 30, 2021. During the financial crisis in 2009, money markets fund assets under management rose to $2.2 trillion but fell below $1.5 trillion for period March 2010 to April 2016. Cash on the sidelines remains a positive catalyst for equity markets.

Overweight cyclical sectors

Accommodative monetary policy, fiscal stimulus, and strengthening corporate investments in plant and equipment should support U.S. large-cap equity sectors that tend to outperform early in an economic expansion. Among the sectors in the S&P 500 Index, we believe Industrials, Materials, Financials, and Energy fit this bill.

See more in our Equities outlook.

Four cyclical sectors with favorable ratings

Play defense in fixed income

Why buy bonds?

While we have increased our long-term interest rate targets, we continue to favor the intermediate part of the yield curve. This preference seeks to take advantage of higher yield potential, without overly exposing portfolios to longer-duration securities, which are more rate sensitive and may struggle as interest rates rise.

Learn more in our Fixed income outlook.

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Stay with commodity price uptrends

Oil price volatility around midyear has dominated the news cycle, but resurgent commodity prices also have included agricultural commodities and industrial metals. We believe that prices will continue moving higher due to strengthening global economic growth and demand.

We believe investors should consider increasing allocations for investors over the tactical 12- to 18-month time frame.

Learn more in our Real Assets outlook.

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Favor equity and credit selection strategies in alternative investments

We expect significant dispersion in performance among sectors, industries, and geographies. This environment should favor stock and credit picking, as well as strategies that capitalize on the economic recovery, increased corporate deal activity, and asset reflation.

If mergers and acquisitions volume continues to increase over the next year, we believe Merger Arbitrage and activist managers should benefit. We expect strong performance from Relative Value strategies focused on Structured Credit and Long/Short Credit and Event Driven managers focused on Distressed Debt.

Learn more in our Alternative investments outlook.

Alternative investments, such as hedge funds, private equity and private real estate funds are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.
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Selected 2021 & 2022 economic and market forecasts

Year-end 2021 Year-end 2022
U.S. GDP growth 7.0% 5.3%
U.S. CPI inflation 3.8% 2.8%
S&P 500 Index 4,400–4,600 4,800–5,000
Federal funds rate 0.00%–0.25% 0.00%–0.25%
10-year U.S. treasury yield 2.00%–2.50% 2.25%–2.75%
West Texas Intermediate (WTI) crude oil $70–$80 $75–$85
Source: Wells Fargo Securities Economics Group, Bloomberg, and Wells Fargo Investment Institute, June 14, 2021. GDP = gross domestic product. Wells Fargo Investment Institute forecast and targets. Forecast and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

Strong market trends can make for wide market divergences, and so diversification and a disciplined plan to allocate cash are valuable allies now. Our Midyear Outlook details the many potential opportunities and highlights some practices that will help you keep a forward focus.

Darrell L. Cronk, CFA, President, Wells Fargo Investment Institute

What do we anticipate happening in the markets for the next 18 months? Here’s a look at five key areas.

Toward a post-pandemic economy

We believe that the global economy is on track for its strongest growth since 1973, paced by the U.S. Global inflation should track higher but avoid disruptive 1970s-era levels.

We view economically sensitive sectors of the stock market, Municipal Securities, and other yield-enhanced sectors of the bond market as best positioned for solid global economic growth, and firm — if not excessive — interest rates and inflation.

From a U.S.-led boom this year to more moderate, uniform growth in 2022

Sources: International Monetary Fund and Wells Fargo Investment Institute, May 18, 2021. 2021 data = estimates; 2022 data = WFII forecasts. Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

The chart shows changes in the rate of growth for real gross domestic product (GDP) for the world, the United States, developed markets excluding the U.S., and emerging markets for 2020 along with forecasts for 2021 and 2022. It also shows the average rate of growth for each area for the period from 2009 to 2019. The average growth rate for the period 2009 to 2019 is as follows: World, 3.7%; U.S., 2.3%; developed markets excluding the U.S., 1.8%; emerging markets, 5.1%. The percentage change in real GDP for 2020 was: World, -3.3%; U.S., -3.5%; developed markets excluding the U.S., -5.4%; emerging markets, -2.2%. The forecast percentage change in real GDP for 2021 is: World, 6.2%; U.S., 7.0%; developed markets excluding the U.S., 4.4%; emerging markets, 6.2%. The forecast percentage change in real GDP for 2022 is: World, 5.0%; U.S., 5.3%; developed markets excluding the U.S., 4.7%; emerging markets, 5.5%. U.S.-led economic growth is expected to exceed other areas in 2021 and be more closely in line with other areas in 2022.

Year two of the bull market recovery

Over the next 18 months, we project U.S. economic growth will remain robust as the country reopens. Investors should continue to lean into U.S. Large Cap Equities, U.S. Small Cap Equities, and Emerging Market Equities while maintaining allocations to U.S. Mid Cap Equities at strategic target weights. We expect strong U.S. corporate earnings in 2021 (surpassing prerecession levels), but higher corporate tax rates may restrain the increase in 2022 earnings.

We believe that cyclical equity classes and sectors should continue to outperform as economic growth surges and monetary policy remains accommodative.

Favored asset classes

1. U.S. Large Cap Equities 2. U.S. Small Cap Equities 3. Emerging Market Equities

Rising rates and defensive positioning

Rising U.S. Treasury yields along with continued government spending, Federal Reserve (Fed) bond purchases, and low short-term interest rates are likely to persist through at least the first half of 2022.

Ultimately, we see overall fixed-income returns struggling but believe exposure in intermediate maturities may provide some cushion for returns against a backdrop of rising yields.

Long-term rates rise

We believe that the Fed will not hike its target federal funds rate through 2022. While short-term rates will likely remain anchored, we expect stronger U.S. inflation expectations and economic growth to push longer-term rates higher.

Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.

Our year-end 10-year target range:

  • 2021: 2.00%-2.50%
  • 2022: 2.25%-2.75%

Our year-end 30-year target range:

  • 2021: 2.50%-3.00%
  • 2022: 2.75%-3.25%

Commodities trend up; REITs waking up

We believe above-trend U.S. and global economic growth should support robust commodity demand and a sustained rally in prices. After having trailed the improvement in the economy, REITs now look poised to keep pace with the upturn. We remain favorable toward Commodities and have upgraded REITs to neutral. Increased oil production volumes and prices should benefit midstream and integrated energy companies.

OPEC+1 has shown surprising resolve this past year by withholding a historical amount of production (see chart). Additionally, U.S. producers seemingly have decided on capital discipline and have not brought back production as quickly as in past cycles. We anticipate that this supply restraint, combined with the economic rebound, booming global trade, and ramping consumer demand should sustain the oil price rally.

1. OPEC+ is the 14 members of the Organization of the Petroleum Exporting Countries plus 10 non-OPEC countries, including Russia.

OPEC spare capacity supports oil price ceiling

Sources: Bloomberg, Department of Energy, and Wells Fargo Investment Institute, as of May 12, 2021. Monthly data: January 31, 2001, to April 31, 2021.

The chart illustrates OPEC’s spare capacity in absolute terms (million barrels per day) and as a share of total world oil production (percentage) for the period from 2001 to April 2021. Spare capacity dropped to as low as 500,000 barrels a day in March 2003 to as high as 11.5 million barrels a day in June 2020. Spare capacity was at 9.2 million barrels a day in April 2021. OPEC withheld a record amount of production in response to the pandemic-associated demand collapse. Despite oil prices being substantially higher now, the group is still sitting on significant spare capacity. We expect OPEC’s continued disciplined approach to bringing those barrels back online as well as accelerating demand to support prices.

Economic recovery expectations support opportunities

We continue to believe that favorable conditions for hedge funds are likely to remain in place.

If 2020 follows past financial crises, now may be an opportune time for qualified investors to consider private capital Distressed Debt strategies that can patiently deploy assets over the next three to five years.

Over the next 12 to 36 months, we favor the Equity Hedge strategy but maintain a neutral view for the Relative Value, Macro, and Event Driven Strategies.

Alternative investments, such as hedge funds, private equity and private real estate funds are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Six favored strategies1. Equity hedge. 2. Long/short credit. 3. Discretionary macro. 4. Growth equity. 5. Distressed debt. 6. Direct lending.

Plan for the second half of 2021. Download the full report.

The full 2021 Midyear Outlook from Wells Fargo Investment Institute offers more insight and guidance for investors, including:

  • • Our full forecasts for 2021 and 2022


  • • Opportunities in international markets


  • • Details on favored asset classes and sectors


  • • Deeper dives into every market sector


  • • More information to help guide your investment decisions


  • Download the full report (PDF)


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