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Capital Market Assumptions

Wells Fargo Investment Institute - July 2018

Wells Fargo Investment Institute has created capital market assumptions, or CMAs, to provide what they believe to be reasonable expectations for asset class performance going forward. Ken Johnson, Investment Strategy Analyst, explains how the CMAs are developed—and what they may mean for investors today.

Transcript: Capital Market Assumptions

Developing an investment plan can help investors meet their financial goals that occur at different points in their lives. These goals can be immediate, short term, or long term and therefore, in constructing a plan, it’s important to differentiate between what’s happening now in financial markets, what may happen next, and what may happen in the future. 

We have created capital market assumptions, or CMAs, which provide what we believe are reasonable expectations for asset class performance going forward. CMAs are long-term averages designed to reflect what investors may experience through two or more economic and market cycles. During these periods, financial markets are likely to rise and fall as the economy expands and contracts. Our CMAs take historical relationships into consideration, but don’t assume the future will be exactly like the past. Keep in mind CMA returns are not promises of actual returns or performance that may be realized. They are based on our estimates and assumptions that may not occur.

CMAs are the foundation for our strategic asset allocation models and our financial advisors use them in investment planning software that’s designed to forecast the probability of an investor meeting their long-term financial goals.

Title graphic: Developing Our 2018-2019 CMAs
When we develop capital market assumptions, we consider long-term themes, looking out 10 to 15 years. 

This year, six key global investment trends helped shape our strategic view:

First – We expect inflation to be lower than long-term averages, but still above the Federal Reserve’s 2.0 percent target.
Second – We see interest rates slowly rising to accommodate improving economic growth and moderate inflationary pressures.
Third – We expect higher volatility in capital markets and lower-than-historical total returns for many asset classes.
Fourth – We think the risk reward trade off in emerging-markets will improve as the market matures.
Fifth – Commodity-price gains are likely to be modest as supply and demand balance.
And finally – We believe alternative investments will play a greater role in potentially reducing the risk of a diversified portfolio.

Title graphic: Investor Implications

We use our asset class CMAs to help develop strategic asset allocation recommendations for globally diversified portfolios that are differentiated by an investor’s goals and risk tolerance. Our 2018 recommendations continue to:

Lean toward U.S. assets in our fixed income and equity allocations
Favor real estate over commodities in our real assets category
And include allocations to alternative investments that may improve risk-adjusted return expectations

It is important for investors to maintain a well-diversified asset allocation to help manage volatility and take advantage of evolving long-term opportunities. Comparing the risk and return characteristics of various asset allocations may help investors choose the portfolio that best suits their individual needs.

Risk Factors 
Diversification strategies do not guarantee investment returns or eliminate risk of loss. All investing involves risk including the possible loss of principal.

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. Alternative investments trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the investor.

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. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

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.

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.

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 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.

© 2018 Wells Fargo Investment Institute. All rights reserved. CAR-0618-03263