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2022 Midyear Outlook: Faster, Further, and Fragile

Wells Fargo Investment Institute - June 2022

Presenter: Michelle Wan, CFA, Investment Strategy Analyst, Wells Fargo Investment Institute

Transcript:

We believe that this economic expansion ultimately will prove to be one of the fastest and hottest in almost a century.

The Federal Reserve’s aggressive tightening should help cool inflation, but that has a side effect of undermining borrowing, spending, and economic growth.

We believe that sticky inflation and the outlook for rising short-term interest rates will outweigh support from solid job growth and erode consumer spending in the months ahead.

And now, after the economic data are deteriorating faster, and we expect inflation and interest rate increases to go further, the U.S. economic outlook looks fragile. As we think about what faster, further, and fragile means, we conclude that the economy is now likely to have a mild contraction or recession late in 2022 and into early 2023. So far, the data indicate a recession that could be similar to that of 1990-1991, not 2008, and our outlook is for lower inflation and stronger economic growth later in 2023.

Recessions are a normal part of the business cycle, and typically patience is one of an investor’s most valuable tools when a recession looks likely. For long-term investors, we favor working with one of our investment professionals to make a disciplined plan to put cash to work, because we believe financial markets are likely to turn higher as investors anticipate an economic recovery.

For shorter-term investors, patience may mean holding cash as needed for near-term expenses, or, for investors looking for opportunities, we favor patiently looking for quality. Our various preferences may help with that process.

We favor playing defense in fixed income portfolios. While interest rates continue to rise moderately — we prefer short-term maturities and municipal securities. In equities, we expect earnings to weaken through 2023 as revenue growth moderates, production costs remain high, and margins contract from record levels. We favor high-quality, U.S. Large Cap and Mid Cap equities over international and U.S. small-cap stocks, and prefer sectors that have good cash flow and strong balance sheets, such as Information Technology, Health Care, and Energy.

In real assets, as the world struggles to balance energy, metals, and food demand against limited supply, we believe many commodity prices will remain near current levels through year end and rise in 2023. 

We favor a broad-based allocation to commodities.

And finally, we believe late-cycle can be an opportune time to allocate to alternative investment strategies that typically have low correlation to equities and fixed-income. We favor Macro and Relative Value, but qualified investors may want to consider adding to Event Driven as we approach a recession.

For more on these recommendations and our top five portfolio ideas for the second half — download our Wells Fargo Investment Institute special report: 2022 Midyear Outlook: Faster, Further, and Fragile.