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Monthly Investment Outlook

Wells Fargo Investment Institute - May 2022

Presenter: Austin Maltbia, Investment Strategy Analyst, Wells Fargo Investment Institute


Equity market volatility has increased as uncertainty around the economic outlook, monetary policy, and geopolitics continue to weigh on the markets. In April, the S&P 500 experienced its worst monthly return in over two years. No one knows for certain how these events will progress, but what we can offer is some advice on navigating the risk-off environment.

So what should investors do?

Volatile markets can be daunting for investors — a string of bad days in the markets can make investors feel more inclined to exit the markets and then re-enter when economic conditions are better.

However, market timing can be extremely difficult, and history has shown us that some of the stock market’s best days are often preceded by its worst days — and missing those best days can be unkind to returns.

For investors, navigating a downturn is generally more of a marathon than a sprint — thus, reallocating your portfolio toward investments that tend to perform more favorably in volatile market conditions can assist in reducing risk exposure, as opposed to exiting the market.

Concerns regarding supply chains, input costs, and the labor market have been some major disruptions for performance in the equities space. We have conviction that a bottom is coming in the equity markets, but at this point, we may not have seen that day quite yet. We favor patience, while challenges in the economy continue.

During this time of uncertainty, investors with a long-term horizon can exercise patience by adding incrementally and in a disciplined way to positions that take them toward their long-term target allocations. Investors who have a shorter horizon can work with their investment professionals to decide how much cash is optimal to hold, and, for any new allocations, to balance between quality and defensive sectors and asset classes. We continue to prefer equities over fixed income, and favor U.S. equities over international — emphasizing higher market capitalization, consistent earnings growth, and low leverage.