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2022 Outlook

Which way to the recovery?

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The markets at a crossroads

As we enter 2022, there are questions about the strength and staying power of the economic recovery, doubts that inflation will ease, uncertainty about Federal Reserve policy, unprecedented supply-chain distortions, rising energy prices, and conjecture about whether to add or remove risk exposure to portfolios.

The 2022 Outlook report from Wells Fargo Investment Institute tackles these questions, offering clear direction on what we see next for the recovery and the strategies we favor in capital markets for the coming year.


Guidance for investors

Our top 5 portfolio ideas for 2022

Favor U.S. assets amid an uneven global recovery

We believe 2022 is poised to be a transition year with unsynchronized global growth led by the U.S. We see opportunities in U.S. assets over international ones. U.S leadership should support a stronger dollar — a negative for international asset returns.

In equities, we expect U.S. stocks to dominate in earnings growth and outperform their international counterparts.

In fixed income, we prefer U.S. issues over bonds in other developed markets. Strong demand, improving business conditions, and a continued recovery should give a relative edge to U.S. REITs (real estate investment trusts) over international REITs.

Image of a skyline from above.

Remain cautious on yield-sensitive assets

We expect interest rates to rise modestly in 2022 from current low levels. Rising rates can lead to low or potentially negative returns for fixed income, leading us to favor equities over bonds. However, within equities, we remain unfavorable on yield-sensitive assets, such as the Utilities sector, and neutral on REITs.

We prefer the high-yielding midstream energy companies, which we expect have the ability to grow distributions over time and potentially outperform in a rising-rate environment.

The Financials equity sector, which also offers above-average yields, can benefit from rising rates that typically generate expanding profit margins.

Floating-rate bank loans (also known as leveraged loans) may be another option for income-seeking investors.

Electricity transmission lines.

Seek assets that perform well when inflation is above average

We expect inflation to moderate from current levels in 2022 but to remain above recent historical norms.

In this type of economic environment, historically commodities have proven to be an effective hedge. U.S. cyclical stocks, such as Financials and Industrials, also should benefit from above-average economic growth and inflation, in contrast to defensive stocks, such as Utilities and Consumer Staples.

Low to moderate inflation Higher than trend inflation
asset class
1 U.S. Mid Cap Equities Commodities
2 U.S. Large Cap Equities U.S. Mid Cap Equities
3 U.S. Small Cap Equities U.S. Small Cap Equities
asset class
1 Commodities U.S. IG Fixed Income
2 DM ex-U.S. Fixed Income DM ex-U.S. Fixed Income
3 DM ex-U.S. Equities Emerging Market Equities
Sources: Bloomberg and Wells Fargo Investment Institute, as of December 8, 2021. Analysis was done using monthly data from March 1, 1997 to October 31, 2021. Higher than trend inflation characterized by 0.2% or higher month over month change in the Consumer Price Index (CPI). Low to moderate inflation characterized by month over month change in CPI less than 0.2%. The table shows the result of top and bottom ranking asset classes but the analysis is based on the following asset classes: DM = Developed Markets. IG = Investment Grade. TIPS = Treasury Inflation-Protected Securities. Analysis done using the following asset classes and representative indexes. U.S. IG Fixed Income: Bloomberg U.S. Aggregate Bond Index, High Yield Fixed Income: Bloomberg U.S. Corporate High Yield Bond Index, DM ex-U.S. Fixed Income: JPM GBI Global Ex U.S. Index, Emerging Market Fixed Income: JPM EMBI Global Index, U.S. TIPS: Bloomberg U.S. Inflation-Linked Bond Index, U.S. Large Cap Equities: S&P 500 Index, U.S. Mid Cap Equities: Russell Midcap Index, U.S. Small Cap Equities: Russell 2000 Index, DM ex-U.S. Equities: MSCI EAFE Index, Emerging Markets Equities: MSCI EM Index, Commodities: Bloomberg Commodity Index, Hedge Funds: HFRI Fund Weighted Index

Look for opportunities to add to risk judiciously

Within U.S. equity and fixed-income markets, we favor reallocating or putting new cash to work selectively and incrementally. Selectivity includes a preference to be selective by moving up in quality.

Portioning cash into equal increments and investing over a specified period of time, or dollar cost averaging, may be a better approach in today’s markets.

Likewise, we favor a continued defensive approach in fixed income markets. Because we expect this environment to persist throughout the year, we prefer not to wait for significant market pullbacks to get invested.

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.

Image of the sky among skyscrapers.

Diversify: Return contributions change over time

We expect positive equity returns in 2022, so higher tactical equity allocations should potentially lead to higher portfolio returns. But for risk mitigation, a bond allocation is generally appropriate for most investors.

For qualified investors preferring a nonbond alternative to hedge equity risk, we favor nondirectional strategies, including Merger Arbitrage and Convertible Arbitrage, and trend-following Discretionary and Systematic Macro strategies.

Investors with a disciplined diversification approach may benefit from multiple return sources while reducing risks within the portfolio.

The diversification benefit for a four-asset-group portfolio was especially evident in 2018, when equity prices declined

As of the third quarter of 2021, alternatives and real assets’ collective contribution significantly outpaced the last five years. In 2022, we expect this trend to continue.

For a full description, click the "view text alternative" link below.

Sources: Morningstar and Wells Fargo Investment Institute. Data as of September 30, 2021. Performance results of the moderate growth and income four-asset group are hypothetical and do not reflect actual investment. Hypothetical and past performance do not guarantee future results. An index is unmanaged and not available for direct investment. Moderate Growth and Income is composed of 2% Bloomberg U.S. Treasury Bill (1–3 Month) Index, 21% Bloomberg U.S. Aggregate Bond Index, 4% Bloomberg U.S. Corporate High Yield Bond Index, 4% JPM EMBI Global Index, 18% S&P 500 Index, 8% Russell Midcap Index, 3% Russell 2000 Index, 6% MSCI EAFE Index, 6% MSCI Emerging Markets Index, 6% NCREIF Property Index, 2% Bloomberg Commodity Index, 10% HFRI Fund Weighted Composite Index, 7% Cambridge Associates U.S. Private Equity Index, and 3% ILPA Private Credit Fund Index. U.S. Investment Grade Fixed Income encompasses the allocations to short term, intermediate term, and long term.

The bar chart shows the return contribution percentage from each of the four asset classes towards the total portfolio from calendar year 2016 to the third quarter of 2021. The solid bar represents fixed income contribution, dotted bar shows equity contribution, diagonally dashed-line bar shows real assets and the checked boxed bar represents alternative assets. Over the last five years, equity remained the largest contributor to portfolio returns. Real assets and alternative assets show growing contribution at the expense of fixed income. In 2018, a year with negative return for the S&P 500 Index, returns from real assets and alternative assets offset the downside from equities; the diversification strength reduced the size of portfolio losses investors would have endured without a diversified portfolio.

It is not the crossroads itself that matters, but rather the decision of how to respond that equates to the greatest success or harm.

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

What do we anticipate happening in the markets as we head into 2022? Here’s a look at five key areas.

A transition year in 2022

  • Our view is that the U.S. will serve as a global-growth locomotive in a challenging transition year from a pandemic-driven economic cycle.
  • We expect U.S. 2022 economic growth of 4.5%, a still elevated 4.0% inflation rate, and fourth quarter unemployment down to 4.1% to favor risk assets, such as equities.
  • A shortage economy will likely keep inflation elevated well into 2022, before supply-chain pressures ease and allow inflation to subside during the second half of the year.
  • A stronger dollar is a negative for international investment returns and reinforces our preference for U.S. financial markets.


U.S. consumer price inflation in October 2021 (YOY%)


our projected inflation rate for 2022

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The best offense can be a good defense

  • We expect next year to be one of transition for global central banks as they balance between supportive policies and inflation threats.
  • Tax-exempt income is likely to be in high demand given the expectations for higher tax rates.
  • We favor playing defense in bond portfolios today. Manage duration (a measure of interest-rate sensitivity) exposure as interest rates continue their upward trajectory through next year. The continuing economic recovery and a modest rise in interest rates should support credit and spread-oriented asset classes and sectors.
Sources: Wells Fargo Investment Institute and Bloomberg as of October 25, 2021. Weekly data from January 2, 2019, to October 20, 2021.

This graph represents the current size in U.S. dollars of Federal Reserve’s balance sheet. The chart displays the increase over the years since January of 2019, but it highlights the large revamp in March of 2020 after the Fed began purchasing assets to counter some of the effects of the pandemic. In July 2020, the Fed began purchasing Treasuries and MBS steadily at a pace of $80 billions and $40 billion respectively.

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Moving up in quality as the cycle matures

  • We expect the level of earnings to continue to rise in 2022, supported by above-average revenue growth and stable or slightly higher operating margins.
  • As the cycle matures, we favor higher-quality asset classes and prefer greater balance between cyclical and growth sectors.
  • We favor leaning into U.S. large-cap and mid-cap equities and favor cyclical and growth equity sectors.

We expect earnings growth to drive returns in 2022

We expect total return to moderate with earnings growth in 2022.For a full description, click the "view text alternative" link below.

Sources: Bloomberg and Wells Fargo Investment Institute (WFII), as of November 12, 2021. Estimates are by WFII. Forecasts are based on certain assumptions and on views of market and economic conditions which are subject to change. Past performance not a guarantee of future results.

Chart shows return attribution for the S&P 500 from 2006 – 2022. We estimate that the majoirty of return for 2021 and 2022 will come from earnings growth. The dark shaded area shows earnings return, the light shaded area shows return due to price to earnings expansion or contraction, and the stripped area shows dividend return.

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Commodity bull still running

  • Commodity prices are unlikely to repeat the stellar performance since mid-2020, yet we do expect more upside in 2022, and we remain favorable overall.
  • REIT fundamentals appear solid, yet higher interest rates may weigh on relative performance; therefore, 2022 opportunities and risks appear balanced.
  • We expect commodities to perform well in 2022. REITs should keep pace with equity markets.
Sources: Bloomberg, U.S. Energy Information Administration and Wells Fargo Investment Institute, October 2021. Monthly data: January 31, 1983, to September 30, 2021.

The chart illustrates oil production levels of the world’s top producers: U.S., Saudi Arabia, and Russia. Oil production has not recovered to pre-pandemic levels despite prices that are miles above breakeven costs. We do expect production to increase in 2022 yet at a much slower pace than previous cycles. This supply restraint in the face of surging demand is a key pillar to our higher oil price forecasts. More details in the text.

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Shifting to noncorrelated strategies

  • We prefer lower-beta strategies such as Relative Value and Macro over directional strategies like Equity Hedge and Event Driven.*
  • Nondirectional strategies such as Convertible and Merger Arbitrage, coupled with both Discretionary and Systematic Macro, should provide “short volatility” noncorrelated returns and help diversify broader portfolio risk.
  • At this still-early stage of the business cycle, we favor hedge fund strategies that provide diversification and noncorrelated returns, as opposed to strategies that benefit from directional equity and credit exposure.

*Beta is a measure of an investment’s volatility in relation to the overall market (as defined by a specific benchmark). By definition, the market, proxied by the S&P 500 Index, has a beta of 1.0 to itself. Individual investments have beta compared with the S&P 500 Index according to how much their price movements deviate from that benchmark’s. An investment whose value moves more than the benchmark’s over time has a beta above 1.0; if less than the benchmark, the investment’s beta is less than 1.0.

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.

Relative Value and Macro have less beta than Equity Hedge and Event Driven

For a full description, click the "view text alternative" link below.

Sources: Hedge Fund Research, Inc., Bloomberg, and Wells Fargo Investment Institute. Monthly data, January 1993–October 2021. Representative indexes include the HFRI Relative Value (Total) Index, the HFRI Macro (Total) Index, the HFRI Event Driven (Total) Index, and the HFRI Equity Hedge (Total) Index. Beta is calculated against a 60/40 composite index of the MSCI ACWI and the Bloomberg Global Aggregate Bond Index.

The line chart shows the rolling three-year (36-month) beta of the four main hedge fund strategies to a 60/40 composite of the MSCI ACWI and the Bloomberg Barclays Global Aggregate Bond Index. Overlayed on the chart are recessionary periods. Though the beta to our global risky-asset proxy has varied going back to 1993, the lower beta profile currently offered by Macro and Relative Value strategies supports our view of using hedge funds to reduce risk and market exposure in 2022

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Selected 2022 economic and market forecasts

2021 YTD (actual) 2022 year-end target
U.S. GDP growth 4.9% (Q3)1 4.5%
U.S. CPI inflation 6.2% (Oct.)1 4.0%
S&P 500 Index 4,567 5,100–5,300
Federal funds rate 0.25% 0.25%–0.50%
10-year U.S. treasury yield 1.45% 2.00%–2.50%
West Texas Intermediate (WTI) crude oil $67 $85–$95
Sources: Wells Fargo Investment Institute and International Monetary Fund (IMF), December 8, 2021. Latest economic and market data as of November 30, 2021. 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.
1. Year-over-year percent change unless specified otherwise

Wondering what to expect in 2022? Download the full report.

The full 2022 Outlook from Wells Fargo Investment Institute offers more insight and guidance for investors, including:

  • • Our full forecasts for 2022


  • • 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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