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State of the Markets Monthly Roundtable

Investor Conference Call Replay - September 8, 2021

Darrell Cronk, Chief Investment Officer for Wealth and Investment Management, hosts a roundtable discussion with senior strategists.

Strategists will cover our latest outlook for the economic recovery; timely equity and fixed income guidance for this stage of the economic cycle, and practical ideas for balancing risk and reward in portfolios.

Audio: State of the Markets Monthly Roundtable investor call replay

Transcript: State of the Markets Monthly Roundtable investor call replay

Brian Behr: This is an external meeting related to Wells Fargo Investment Institute. Good afternoon, my name is Brian Behr and I will be your event specialist today. At this time, I would like to welcome everyone to the Wells Fargo Investment Institute State of the Markets monthly round table. Mr. Cronk, you may begin.

Darrell Cronk: Thank you Brian, good afternoon, everyone. Thank you for joining us for the state of the markets monthly round table. It is Wednesday September 8, 2021. My name is Darrell Cronk. I am the chief investment officer for our Wells Fargo Wealth and Investment Management Division, and I’m really privileged to have all of you joining us today for what I think will be a really robust discussion about where we stand today in the capital markets and a lot of things orbiting, as we get ready to finish out the last, let’s call it three-and-a-half-month sprint to year end 2021. Hopefully everyone had a wonderful and relaxing Labor Day weekend and looking forward to getting into the fall here and really focusing on what capital markets are going to give us. I have the great pleasure today of being joined by four people for our round table on our strategy team probably familiar names and faces to many, if not all of you. Paul Christopher, who is head of global market strategy for our team. John LaForge, who is head of real asset strategy. Brian Rehling, who’s head of global fixed income strategy and then Sameer Samana, who’s our senior global market strategist for equities. So, we’ve been hard at work through the month of August, I hope all of you have been taking some time away or getting some time away, but the markets have been good for the most part and semi-well behaved. We haven’t had to deal with any major corrections through basically the entire calendar year of 2021 so far. I am going to maybe just jump us in and see if I can’t frame today’s discussion, at least for the round table, give you some context of where we stand, obviously since this is a state of the markets call and then spend a few minutes talking about things that we have our eyes on that we think are going to be important in the remaining three and a half months of this year.

So, if you were to simply look at just the equity markets, we finished last week as we moved into Labor Day with a thirteenth week in a row, we’d have to go all the way back to early June, where the S&P 500 posted a new closing high, at least once each week for the 13 weeks straight. So, we’re trying to keep that streak intact for this week as well. In fact, for the month of August the index posted twelve new closing highs in a total of twenty-two trading days. That actually makes it tied for fourth all time when you go all the way back to 1926. The record was 77 new all-time highs back in 1995 it looks like for all intents and purposes we very well may finish 2nd all-time back to 1926 in the number of new highs for the S&P 500. We’re at 53 today but closing in on the number 3 and the number 2 positions. Investors are quite happy, not surprisingly, if you were to look year to date and if I use the S&P 500 as a gauge, the index is 20.2 percent year to date and that’s on the back of calendar year 2020’s 18.4 percent and calendar year 2019’s 31.49 percent total return. So, investors, particularly equity and risk investors, have been treated very well over the past three years not withstanding all the other drama and everything that’s been going on within both the capital markets and the global landscape. September traditionally is the weakest month of the year historically for the equity markets going back to basically 1950. There are many reasons for that of which I probably don’t have time to get into today. Maybe we can ask Sameer to comment on some of those. We will speak to Brian today about interest rates, are again slowly trending higher, after putting in what looks to be some near term lows this time last month on the 10-year U.S. treasury at about 1.15 percent. The yield curve steepening as the markets are really trying to gauge the timing and the pace of the fed tapering later this year or early next. And for the most part, credits spreads remain very tight for this point in the cycle with lots of liquidity in the system and just that liquidity continuing to hunt or search for yield.

Commodities which we will speak to John about, continue to be one of this year’s stand out performers. Right now, on today’s close, we are besting equities for the sp500 by almost 400 basis points or 4 percent. That’s one of the strongest calendar years that commodities have put together in the past decade. You know, for example, just today, natural gas hit its highest level we’ve seen since February 2014 so if you’ve had a commodity allocation like we’ve been talking about for months have been favorable or overweight that it has certainly treated you well this year. And then interestingly we continue to see some of the strongest demand overall for alternative assets. So, think about things like hedge funds, private capital, whether that’s private equity, private debt that we witnessed in the decade, just to give you an idea, our own platforms flows August was record month for us and we are up well over 100% in flow and usage of alternatives just in the last 12 months so a lot of liquidity out there chasing a lot of assets.

That’s not to say that everything is good news. Challenges remain as you know, if you’ve been paying attention to the economy, which we will speak to Paul to, we’ve had kind of a recent growth slow down, some would call it a growth scare year based off of where expectations were. The way I would define this as I set the stage, is that I think there is probably three specific challenges of note coming out of Washington D.C. and three others that I would, really, all of you are probably seeing and experiencing up and down main street America that I think we’ll get the round table to talk about today. The three big Washington stories, and this is no secret, are the progression or potential passage of the 3.5 trillion-dollar proposed infrastructure bill by the administration, its grinding its way through the beltway right now. Just for context, if it were passed as proposed, it would be the single largest fiscal spending bill in more than 100 years, surpassing by quite a long shot, the previous and recent 1.9 trillion American rescue package passed earlier this year in March.

Also, item number two out of Washington D.C. are tax policy changes. In order to pay for that new spending bill. So proposed at least at this point are the largest and most sweeping tax increases spanning both corporate and individual tax regimes basically going to back to near 1968. So, we need to keep our eyes on that about how that moves through and what variables it has associated with it. And then also, the third item coming out of Washington D.C. is really around the debt ceiling. So, if you’ve been paying attention and we’ve bumped up against, as of July 31st, the 2-year suspension of the debt ceiling. The U.S. treasury had indicated that they had enough money to kind of keep the government operation through mid-November, although just today, treasury secretary Janet Yellen was out stating that the government would run out of money by October, not November if the debt ceiling wasn’t raised. So those three items together have the potential to add a mix of volatility into the capital markets into the fall and I think investors need to be paying attention to, certainly I know we are. So, if those are the three Washington D.C. challenges, and eyes on important implications, there are three more I just want to spend a minute framing and well spend some time with the round table talking about. And again, I reference these earlier as main street type challenges. The first one is around labor market trends. So, we saw on Friday the August non-firm payroll report, was really a surprise number to the downside as we only added 235,000 new jobs, versus an expectation of materially more than that.

What is interesting is that when you look at the report in detail, we still have considerable amount of unemployed people, but we have far more job openings and opportunities than we have unemployed people. In fact, wages grew in August, especially in the leisure and hospitality sectors. Main street seeing businesses having trouble hiring and retaining workers. In fact, if you look at what’s called the NFIB national federation of independent business, it shows that roughly half of businesses throughout America that were surveyed are not able to find or hire the people they need to meet the demand for the business. There is even a shortage of school bus drivers as we head into the fall and everybody goes back to school so it certainly, the labor market trends are a national story that I think will drive economic growth through this fall. So, we are definitely keeping our eyes on that, and I will ask Paul to speak more to what we’re seeing there.

The second real item I just want to hit on quickly are supply constraints. So, we also talk to many of you seeing this every day in the form of supply shortages so think homeowners waiting on materials for home repairs, falling new car inventories due to global shortages of computer chips, manufacturers trying to replenish inventories. There are log jams at big ports on the west coast, some say that will persist even into next year. Combined with shortages of shipping containers, dock workers, trucks, truck drivers. So, all of that is putting upward pressure on prices and upward pressure on inflation. So, we need to watch those supply constraints and how quickly they dissipate very closely into the fall and as we turn the calendar into next year. And then I’d be remise if I didn’t highlight the third one that I think is vitally important, again, that all of us are experiencing on a main street basis which is the delta variant. You know, so fall approaching, the U.S. is back up to 161,000 COVID-19 cases per day, at least through this last weekend 103,000 hospitalizations per day. We’re now running at about 53 percent of Americans fully vaccinated, so there’s a lot going on here around businesses reverting back or extending remote work. There seems to be little appetite from either state or local politicians to stomach a repeat of the 2020’s economic shut down and so we’ll have to watch how that affect consumption patterns, travel patterns, spending overall because it will matter as we move into the economic growth of the summer. Or excuse me, of the fall. So, with all of that as context and I gave you a lot of information there, but I thought it was important, this is a state of markets call, to set the context of what’s been working well which is outstandingly the capital markets and then where do the challenges lie and what do we have our eyes fixated on as were going into the remaining months of this year. So let me stat the round table and bring Paul, John, Brian and Sameer into this discussion. So, Paul, I actually want to start with the labor market trends. So, I mentioned earlier there’s 10 million job openings in the U.S. and there are still 8.4 million Americans unemployed. It seems like we could match those two together, very quickly have full employment and be off to the races, but obviously it’s not that simple. So how do we think about where the labor markets are and maybe as importantly or most importantly that has big implications for consumer spending and tailwinds for economic growth.

Paul Christopher: Yeah, so as you pointed out Darrel, 235,000 jobs added in August. You know, if you think about it, that’s a really good number for a normal month. But in a period when we’re trying to recover from lockdowns and COVID, the market forecasters are looking for more like 750,000. So that’s been kind of the problem for markets lately is reconciling the pace of recovery with the actual expectations. And there’s a couple of variables that occasionally disappoint. July was a great month; August was a disappointment. What’s going on? Well construction jobs were short in August. Why? Guess. There’s as shortage of lumber. There’s a shortage of construction supplies, so builders don’t need so many workers because there is nothing to build with. And then an even bigger impact comes from COVID. As the COVID wave continues here with this delta variant, what we’re seeing is that people are not wanting to congregate. So that means that the hospitality and leisure industries collectively are not going to be adding as many jobs in months when that’s going on, when that COVID thing’s going on, as in months when people feel better about going to restaurants and movie theatres. So, in July we added 415,000 jobs in leisure and hospitality. In August, it was about flat. So, you can see that’s a huge difference, that 400,000 number right there is almost the amount of the disappointment between the actual and the wall street forecast. The important thing to remember here for the investors, is that jobs are growing, wages are growing. Jobs times wages equals spending. Spending drives the economy and earnings and the stock market. That’s what we think is going to happen, it’s just going to be a little bit more spread out over time. It’s not going to be quite such a short-term surge.

Darrell Cronk: Yeah, I think you’ve, our mid-term outlook was fuel for growth, and I think you adequately described it well as that fuel has a slower burn to it, instead of an explosive growth period that fizzles out in a short period of time. So, I think that adds some context. Before I leave this topic on macro and economic growth and how to think about it though, let me just hit this finer point. So recently, I think we just took down our U.S. GDP growth targets mildly, not a bunch, but still eye-popping numbers and also concurrently took inflation estimates up as well. So can you speak to what are we seeing happening there if growth is in fact slowing from a white-hot level and inflation is maybe stickier or more sustained than I think most had though.

Paul Christopher: Yeah, the problems are tied together. And so, when you have supply shortages and you have a lot of fuel for growth, by the way it’s not just government spending, it’s a very large accumulation of household and business savings that people are waiting to spend. And you saw a lot of that spending get unleashed in the spring quarter of this year and the economy really surged. What’s happened since then is you’ve had the combination of covid and supply shortages and that has really frustrated people’s ability to spend. Number one they can’t get out and buy the things they want to buy because of COVID. Number two, the things they want to buy like used cars or new cars, just aren’t available and so you know, or even number three because of the supply constraints, inflation starting to go up, costs of goods sold are starting to rise and because of that again, people get discouraged, they say, “Well the prices are too high right now, wait for them to come down” and so people are holding back on that savings, that fuel for growth is not getting used and what we think is going to happen instead of a big surge in the middle of this year, followed by a quick retreat back to normal growth levels, we think those frictions of supply constraints, COVID and inflation will keep people enough on the sidelines that the fuel will get spent out over a longer period and for an investor that’s kind of an interesting outcome because it means that earnings growth also gets extended over a longer period of time and you possibly have a longer period in which stock prices could be rising. So that’s our focus.

Darrel Cronk: Yeah, well said and an excellent point. Let me pivot on that then and bring Sameer into this conversation because Sameer, I gave plenty of statistics specific to the S&P 500 earlier in the conversation, but in some ways, the equity markets have been like a Teflon market. It hasn’t mattered where you’ve been, what sector you’ve been in, what market capitalization you’ve been in. Many, if not all have done very well, so when you look beneath the surface, how should we be thinking about, as we look to close out this year and the final quarter and a month sector level exposure and then maybe just address this idea of market valuations aren’t cheap and yet we haven’t had any kind of a material correction in a long time, we’d have to go back to almost this time last year I think, October of last year.

Sameer Samana: Yeah, I know, absolutely. Let me kind of pick up where Paul left off. Which is, you know, one of the concept s that he hit on is the intensity. Right? If some of the intensity of that fuel for growth is kind of coming off the burn so to speak, whether it’s due to delta or whether its due to fed chatter, or whether its due to just the S&P is down, but that’s meaning for markets anyway, despite all those records, if you look underneath the hood kind of in the past 3 to 6 months, cyclicals such as industrials, materials, energy, financial have lost the momentum right? And a lot of that can be traced back to like Paul mentioned, a lot of people are finding difficulty going outside. They’re having difficulty buying all the things that they want. When you look at financials, they’ve done pretty well but you know what’s interesting is rates have been stubbornly low, so that’s not exactly helping them drive more profitability. When you look at someone talk around the fed, possibly tampering bond purchases or the dollar doing a little bit better, or even oil coming off the ties, all these things have basically led to investors reverting back to where they were hiding last year, which is larger cap growth companies. We think a lot of these issues are temporary. I refer people kind of back to the state of the markets publication that you authored, where you talked about a lot of these risks being ones to watch, but quite a few of these are ones that people should be fading. And so, you know, that’s kind of our thinking and I tend to agree with that. Then, what’s probably going to happen next is you’ll see quite a few positive surprises and cyclicals should do really well over the coming quarters. Now, you know, I appreciate the point about valuations, and they aren’t cheap, and I would argue they’re probably full for most asset classes. Right? When you have this amount of liquidity and rates basically pegged to the ground at zero on the short end, we have people basically searching for yields and returns in almost all corners of the market and equities are no exception. But, when you look at relative valuations to bonds, whether that be on an earnings basis if you compare the earnings yield to bond yield or even dividend yields. Kind of, what am I getting in my pocket? Both those tend to be for the most part historically high and very consistent with very solid returns. And that’s one of the reasons why you haven’t seen a big correction is a lot of folks as they had those paychecks come in, or as they had those cash flows come in, they had to find a new home for a lot of that money. It’s not like they’re ignoring some of these risk factors that you’ve mentioned, they just have to allocate those assets and they’re still finding stocks as kind of the best place to go with that money. Now it is worth noting, you’ve mentioned there is some seasonality as we head into the fall, I think you have to be a little careful with that because clearly if it’s sold in May, the old adage, you’re coming back from May and going what the heck happened? I was supposed to be able to buy stocks at lower levels. Well unfortunately, stocks have been nothing but moved higher through much of the summer so you have to be very careful with seasonality, but if there’s volatility and you know, you checked out a lot of reasons that could cause volatility whether it’s the delta variant, whether it’s more news out of China, whether it’s the fed, whether something to deal with from Washington, those would kind of be your usual suspects. We want investors to be kind of ready to take advantage. Again, we think that cyclicals are probably the area that are priced in probably the most worry about a lot of these factors and so if they start to kind of get taken out of the wall of worry, that’s where we see the most upside.

Darrel: All really great points. I’m going to come back to you here in a minute on this round table because I have a few more equity points in conversation that we should have. So, Brian let me bring you into this conversation. So, you’ve had a... Brian’s had a tough year, and I don’t mean that in the form of his recommendations, he’s done an excellent job but if I simply use the ten-year treasury as the barometer and its yield, a year ago this last August, August of 2020, the 10-year treasury was at 50 basis points. By March it had run up to 175 basis points. Then through the summer months, it fell back down to about 115 basis points and now today its climbing back higher at about 135 basis points, so it’s been all over the place quite frankly in the last 12 months. So, as you think about yield curve has steepened, it has flattened, it has shifted up it has shifted down. How do you think about what the yield curve is telling us today as investors and how we should position particularly around fixed income for the rest of this year and into next?

Brian: Yeah, I mean, it has been an interesting 12 months for sure. As I look at the rate market today, things have been relatively stable recently, I guess so those longer-term rates are inching back up but inching probably being the key word there. I think overall the bond market is pretty supportive of a good kind of risk on outlook, nothing crazy, it is suggesting that growth will continue. The yield curve is in a positive slope by a relatively meaningful amount so, that’s good, by no means the steepest we’ve seen but, by no means the flattest we’ve seen either at this point in the cycle.

Brian Rehling: The yield curve is in a positive slope by a relatively meaningful amount, so that’s good. By no means the steepest we’ve seen, but by no means the flattest we’ve seen either at this point in the cycle. Overall, I think it’s just steady as she goes. I don’t think the bond market is seeing any significant hiccups along the way. I don’t think the bond market is expecting a sustained surge in inflation, I don’t think the bond market is expecting a significant drop off in growth. I think the bond market is just suggesting that the path ahead looks relatively good from an economic outlook, and, you know, these low rates are also influenced by a massive fed balance sheet, which even though tapering is on the menu, is not going to go away. I think these relatively low rates are here to stay. Everything else bond market wise looks pretty good, I think.

Darrell Cronk: So, the bond market to you is still flashing, kind of, early cycle to trending into mid cycle dynamics, so relatively early in economic recovery. There’s nothing suggesting recession is in the mint or near.

Brian Rehling: Absolutely, yes, no. Still in decent growth mode going forward, yes.

Darrell Cronk: Ok. I’ll be back to you to. Let me bring John into this conversation. So, John, you’re a rockstar this year with your commodity performance. Things are hitting on all cylinders for, as I said earlier, the first time in almost a decade where commodities had been sustained underperformers. How should we think about our commodity exposure portfolios, and what’s the real driver? What was the inflection point that turned the corner for commodities? 

John LaForge: It was really, Darrell, the turning point was really March of last year so 2020. And, we had been for ten years in commodities, building in this low prime, which was taking supply down over ten years. And then COVID hit, and demand got thrown out of whack, and that just set all commodities supplies down even further. And the way commodities operate, is getting supply going again take a long time. This goes to the earlier comment of whether it be lumber prices, people can’t find simple things to build into their home, whether it’s steel or pvc pipe, or concrete. That kind of thing. It takes a while to bring that supply back. So COVID sparked it, but it was the ten years prior of declining prices across the commodity complex, that really was already driving supply low. So here we are today, so now September of 2021, and effectively what we have is, pretty much across the commodity complex, we just don’t have enough supply. You said it yourself Darrell, high dollar natural gas prices, we haven’t seen that since 2014. And frankly what’s fascinating about all of that is oil, also at $70. You look at US production of oil this year, it hasn’t gone anywhere. From January until now, we’re producing the same amount of oil today, as we were at the beginning of January when oil prices where closer to $45. So, what’s happening is commodities are hard to produce, and frankly, globally, they are not doing a great job of things. So, the answer for investors is this is more than just a 2020 or 2021 play, this is a longer-term play. And having commodities in a portfolio, we think, is going to be something you’re going to want for years to come.

Darrell Cronk: Yea I think you’re right. And you’re, we just got talking about early stages in economic recovery. You’re probably very early in the new commodities bull market would you agree?

John LaForge: Yea the average bull, and this is using data back 100 years, and this is those super cycle bulls that last multiple years in a row, it’s about 16 years is how long they typically last. And we’re at the average, as of today, we’re a year and a half into this bull.

Darrell Cronk: Yeah, great point. So, Paul I’m going to come back to you. We’ve talked a fair amount about supply chain disruption and the labor markets. I want to pivot here for a minute and spend just a moment on, kind of some of those risks I outlined around Washington D.C, and perhaps maybe specifically this three and a half trillion dollar proposed infrastructure bill, and how we think that will affect markets, right, given our reference earlier. It’s the largest, at least proposed, hasn’t been passed yet, in a hundred years. And it’s also, you know, well there’s an old Washington D. C. adage about “nothing is ever as permanent as a temporary government support program”. Right? So how many of these fiscal stimulus packages should we assume are or presume lie in the wait for us down the path here.

Paul Christopher: Yea I’m not sure how many more we get after this one. You mentioned how large it is. And the tax increases will be the largest since 1968. That only funds roughly half of it. So, it might be difficult for congress to outdo itself in the future. But there are probably some interesting investment opportunities coming out of this. The most obvious one is maybe the one you didn’t mention, the bill you didn’t mention, would be the one trillion-dollar compromise physical infrastructure bill. The three and a half trillion is more social services. But the one trillion one, that’s the roads, the bridges, the 5G networks. And that really could boost spending on construction around the country. We’re already favorable, Sameer will tell you, on any of the industrial and material sector so if you’re following our advice, we think you’re already pretty well positioned for that going forward. We’ll have to see whether sectors might benefit from the social services spending, like maybe healthcare, where right now we’re just neutral, stay with your long-term recommending market weight allocation. But then there’s the tax side of it, and we’ve been talking for some months about this saying, that you know, look, you may see some increase in the capital gains tax. Maybe to 28% that seems to be a reasonable level for compromise. You may see some increase in the, we think you will see some increase in the corporate tax rate. We’ve already factored that into our earnings estimates. We think you’ll definitely see the personal income tax rates go back to where they were pre-2018. And then there’s some other items on the table that might affect gifting, like inheritance tax, and the step-up basis. And so, because we don’t know how quickly those will pass, or which ones will be included, and we don’t know the affective date. Congress may decide to make the effective date the date the president signs the bill into law, or maybe even a little earlier than that. It’s really good advice we think to talk to your investment professionals, but also your tax planners in order to think about whatever gifting you might be needing to make, or sales capital, potential capital gains you might want to harvest this year. 

Darrell Cronk: That’s an excellent point, and so much of the time we’re conditioned to think if there is a change in something like capital gains tax rates that it would just start in the new calendar year. That it wouldn’t be retroactive back to either current year or some date, you know, throughout the year. And that’s entirely possible if not even plausible under this scenario. So that’s a really good point and one that we should highlight as you think about speaking to that tax and investment professional. Paul before I leave this topic, just a minute on the debt ceiling. I know the team wrote a really good piece called Investment Implications of a new debt ceiling debate. It was 10 years ago, 2011 for those of you who remember where we had the downgrade, the S&P downgrade of the US Sovereign rating from AAA to AA all over this kind of debate and head butting around raising the debt ceiling. Are we in for that type of scenario again 10 years later?

Paul Christopher: We think there will be some intense debate around the debt ceiling, and you mention the secretary of the treasury moved forward the date at which they really need to have this figured out. The interesting piece of this, interesting being in quotes, is that congress really has four things to juggle right now. The two bills we mention on spending, including the taxes. But also the debt ceiling and the budget itself for this coming fiscal year. And we don’t think that either party has any sort of incentive at all to play brinksmanship with the debt ceiling. In fact, we think that that would be the last think on there minds since they have other things on the front burner that are more important. Both democrats and republicans in terms of the spending bills and the taxes and the budgets. So we think it’s a very strong probability that some sort of debt ceiling deal gets made in the coming weeks before the end of October. It might even end up being thrown into a reconciliation package along with that three and a half trillion-dollar bill that you mentioned. So, we’re not expecting, short answer, not expecting a repeat of August 2011. We are expecting, though, some coming weeks where it will be an open question how they’re going to decide it. That will contribute, probably, to some of that volatility that we’re looking for in markets.

Darrell Cronk: Yeah. Really good points. So, Sameer, I’m going to come back to you. Let’s just talk about market valuations for a minute. You know, the second quarter earnings season was one of the fastest, the best beat ratio we have basically in inked history for all intents and purposes. But there’s a lot of concern given markets, you know, have, as I mentioned at the onset, 3 years in a row now gone materially higher almost to the tune of 20% a year, that valuations are getting stretched. And yet I think the irony here is if market valuations are had moved higher, if you look for the calendar year 2021 price earnings rations have actually fallen simply because earnings have grown faster than prices have. So how should we think about market valuations as we stand here in early September 2021.

Sameer Samana: Yea, so basically there’s two major components to your kind of valuations, kind of how we build up to our S&P target, and you know, probably the biggest piece of it, the one that probably gives us the most comfort is the earnings piece. As long as earnings are 1) growing at a positive rate and 2) doing what they’re doing this year which is basically you’ve got earnings estimates for many folks basically going up as the year goes along. That almost never happens, right. Most years analysts come into the year, and they end up marking down their estimates all around inflection point which you have happen, what’s happening right now which is, for the most part things kind of keep playing out better than expected and they keep kind of chasing those numbers higher. We’ve been ahead of this streak but the streak kind of caught up to us. So, we recently raised our earnings numbers and our targets if you notice. So now we have kind of 210 as our earnings per share for the year for the S&P. And then for next year we have $230 per share for the S&P. And so, if you basically take the S&P kind of where it stands today and you think about it as an investor and you say, alright, over the next year I will get something on the order of $220 or $225 in earnings occurring to me as a part owner in these corporations. And to your point that’s about a 20 times price earnings multiple. And that’s actually well below where we started the year, and it’s not too far off where we were pre-COVID even though rates have fallen quite sharply. So, you know, from that standpoint at least you continue to have a very nice positive upward trajectory, and, you know, the point about surprise is a great one. The fact that people are still playing catch up is a huge positive. And then the second component is the price earnings multiple, right. What PE do you put on those earnings? And history tells you that to the extent that you have lower rates, history tells you that to the extent that you have manageable inflation which, again if you look at our numbers for next year, this year will tell you kind of the base affects. The year over year comparisons are a little weird, a little wonky, but by next year inflation will kind of settle back down again. It will probably be higher than it was pre-COVID, but it will settle back down. If you take kind of those two components and then the very low volatility that we’ve seen and the tight credit spreads, all those different things you kind of, put them all together. What that tells you is that you can actually pay a fairly, call it historical multiple for stocks. Which again would kind of be in that high teens area, now, again, because rates are a little bit historically low, because liquidity is gushing, stocks have probably tipped a little bit higher than history would otherwise suggest. Now, as rates reset, those multiples will come down. Which is why, if you look at our numbers for next year we anticipate probably a little more earnings growth than we do price appreciation. And that’s how the multiple will come down, so for those that are worried about multiples contracting or stock markets losing their value, we would argue that earnings growth is more than enough to accommodate both for their gains and for that price earnings multiple to kind of, you know, basically start to kind of come down a little bit as those rates move higher.

Darrell Cronk: So, stay invested in equities, higher earnings through this year into next year. Give me a 2022 S&P 500 target price.

Sameer Samana: So, our target price for next year is $5000, so we think from current levels you can have another 500 points on the S&P which would basically put you kind of in the mid-teens when you take into account the dividend yield.

Darrell Cronk: Excellent. Ok, Brian back to you. So much ink is spilled about fed tapering and what it means, and how to think about it, you know. Tapering is just a buzz word for the federal reserve slowing, if not stopping, their purchases of treasury securities and mortgage-backed securities. They’re purchasing 120 billion dollars a month, today, 80 billion in treasuries 40 billion in mortgage backeds. How meaningful is fed tapering and how much should, as an investor, should I care versus all the attention the media seems to put around it.

Brian Rehling: Yeah, good question. It’s obviously on our radar, I think most investors, I just don’t think it’s going to be very impactful, honestly. Markets are expecting it, number one. Number two, the fed balance sheet when they begin to taper is going to be around 9 trillion dollars. So even as they taper, which means they just are adding to that balance sheet at a slower pace, well the balance sheet is still going to be 9 trillion dollars plus. They’re not going to start reducing the balance sheet for quite some time. So, it’s not really going to impact the liquidity situation in the markets, which is very positive for risk assets. And markets are expecting it, so I don’t anticipate big reactions from markets to tapering. That said, why should investors pay attention to it? Because it is meaningful in the sense of, it’s the first domino that needs to fall in essentially a sequential number of dominos from the fed to begin rate hikes. Now that’s still well into the future, but of course you can’t get to those eventual rate hikes unless you actually start with a taper. So, it’s worth paying attention to, but any market impacts at this point is going to be relatively minor, I think. Darrell Cronk: Yeah, really good point. So, John back to you. Give me just a quick, kind of 60 second, 90 second lens on how we are thinking about real estate today. There’s a lot of noise around real estate and the sunset of forbearance provisions in both residential and commercial and, you know, supply/demand dynamics that are at play. SO how should we think about real estate investing from this point forward?

John LaForge: Slow recovery still, Daryl. We’ve been neutral for a while because things got really cheap for a little bit, and we knew we were going to recover, but the way to think about real estate is they’re called mid-cycle plays. So, when you come out of a recession, so think a year and a half ago, you have certain stocks that will do well. They’re called early-cycle plays. After year 3, 4, 5 after a recession, that’s when real estate starts doing better. Because jobs are coming back, people are going back to work, they’re making more and so on. And they can pay the rent. They can open up the office space. And we’re frankly not there yet. There was a recent study, just recently came out, that showed that 33% of office space, this is in the United States right now, is occupied. That’s a very very low number. Office we already knew was going to have some struggles. But if we go back to pre-COVID levels, occupancy is usually around 95%, not 33%. And it’s been a slow grind higher. And that’s a way to think about commercial real estate generally, is, we’re not out of the woods yet. We’re still coming back with jobs. We’re still coming back to the economy getting better, and real estate typically is not the first set of stocks that you want to get into. It’s something you get into a few years after your expansion, your economic expansion begins. So, it could still be a couple years. I know that’s a long time, but, you know, we’re hoping next year will be the year we can finally say yes, this looks good for real estate. But we’ll see. For now, we’re still just neutral, and think of that versus a basket of stocks. We’re neutral on real estate versus a basket of other stock.

Darrell Cronk: Ok. Great points. Alright, round table, a lighting round here so stay short and brief on me. So Brian, starting with you. High yield bonds and high yield municipal bonds. Like them or don’t like them heading into next year?

Brian Rehling: Yeah, I mean we’re neutral which is actually one of our higher ratings within fixed income. So, I’d continue to hold an allocation there, but you know you have to be cautious, they are expensive.

Darrell Cronk: Yeah, credit spreads are tight which doesn’t make them cheap, but a lot of people want the carry right?

Brian Rehling: That’s right.

Darrell Cronk: Sameer, top asset classes or top sectors I should say. Skip the asset class and just go to sectors for the remainder of 2021.

Sameer Samana: Yeah, the most important thing still is anything but defenses but with a particular emphasis on cyclicals so that would be financials, industrials, materials, and energy.

Darrell Cronk: John, we didn’t spend any time talking about two of your favorite topics: gold and oil. How should I think about them the rest of the year?

John LaForge: Like them both, but for different reasons. The trend, the positive trend, is in oil, natural gas. So, energy is doing well. Gold has been lagging, but it’s a contrarian play. So, we like that moving into next year (gold), but for now oil is the play, at least to the end of the year.

Darrell Cronk: And Paul, bringing this home. How should I think about domestic versus international exposure for the rest of this year? If you think about where the greatest GDP growth opportunities or maybe inflationary problems lie, where should I lean as an investor today? 

Paul Christopher: Maybe somewhat stronger inflation in the US, but also much stronger growth and fewer problems with COVID here than in other parts of the world, especially in emerging, in some of the Latin America, Africa, and Eastern European markets. So, prefer US markets, prefer stocks to bonds and cash. No is not the time to take profits here in the US.

Darrell Cronk: Yeah, really good points. So, John, Brian, Paul, Sameer. Thank you as always for the wisdom that you impart on this brief 45-minute call. I know we give you a lot of information, we try to use your time judiciously. Hopefully it’s been beneficial to spend the time with us. We’re always here to help and answer questions if you have any. Thank you so much for both spending the time with us today and the trust you place in Wells Fargo to help manage your financial assets. We appreciate you attending, and we will talk to you again in October unless the capital markets give us a reason to come back to you sooner. Brian, with that that will conclude todays call.

Brian Behr: This concludes this afternoon's Wells Fargo Investment Institute State of the Markets Monthly Roundtable.

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