2019 Midyear Review: Recommended Actions for Where We Are Now

Strategists from Wells Fargo Investment Institute weigh the markets' performance so far—and what they believe investors should consider next.

by Mike Woelflein - May 20, 2019

March 2019 marked the 10th year of the bull market in U.S. stocks. In fact, the S&P 500 has seen a decade of better than 17% annual growth. And, more broadly, from the middle of 2016 to early 2018, virtually every asset class—emerging-market stocks, bonds, commodities—posted gains.

But the return of market volatility during the past year means investors should be increasingly mindful of their investments. “It’s going to be more difficult to earn attractive returns,” says Tracie McMillion, CFA, Head of Global Asset Allocation with Wells Fargo Investment Institute (WFII). “You have to be more careful and more selective going forward.”

At this point in the year, as the strategists are analyzing data to create the 2019 Midyear Outlook report, they aren’t forecasting widespread and outsized returns or predicting a recession in 2019. “Capital markets are at a crossroads, where they could pivot higher or lower,” says Paul Christopher, CFA, WFII’s Head of Global Market Strategy. “We want investors to be more proactive, and we really want to emphasize tactical rebalancing.”

Here, McMillion and Christopher share a preview of WFII’s take on where markets are now, as well as additional considerations for investors as we head into the second half of 2019.

A group of confident investors inspect notes on what could be investment or market trends.

Where markets are now

  • Volatility is back.The global equity rally of early 2019 alleviated fears of quickly falling into a recession, but caution remains a major theme. That’s due to factors including the slowdown in Europe and tightening credit markets. Volatility will likely remain, even if the overall view for the markets remains positive. “Ups and downs are normal parts of the market cycle,” says McMillion, “just as economic expansion and recessions are normal parts of the economic cycle.”
  • The balance between risk and reward is shifting more quickly. As a result, Christopher says, WFII has moved from favorable to neutral on some key asset classes—such as large-cap U.S. equities and developed-market stocks—while beefing up positions in fixed income and cash. However, he says, neutral doesn’t mean unfavorable. This is a move back to typical base allocation in these areas. “This isn’t doom and gloom,” Christopher says. “It’s more of a call to be more selective.”
  • The bond market is still attractive. The U.S. Federal Reserve has moved from a commitment to gradual increases of interest rates to a more patient stance. WFII strategists do not expect any further rate increases in 2019, with longer-term Treasury yields near current levels at year-end. McMillion says that while bonds don’t historically return as much as equities, they’re an important part of a balanced portfolio because they can hold up better in price when stocks are volatile. “You want to be a little bit more defensive in bonds,” she says, “and more selective, with an eye toward higher credit quality.”
Key Considerations for Investors

Key considerations for investors

  • Stick to your long-term plan. Your target asset allocation should align with your risk tolerance and your long-term investment goals. If you’re comfortable with the current mix, McMillion says, make sure market movements—especially toward the downside—don’t shake your confidence. A well-thought-out, diversified portfolio is likely to benefit from current market conditions, she says. “A good plan can give you the discipline, when there’s fear in the market, to not let that fear affect you,” she says. “It can keep you from making bad decisions.”
  • Rebalance to stay aligned with your goals. The most important step now is to rebalance your portfolio in a disciplined way, Christopher says. For example, the year-end forecast for the S&P 500 Index stands above 2,900. The index floated slightly above that figure this spring, in our opinion, making it a good time to take some profits to reinvest so that you stay aligned to your target asset allocation. “That’s rebalancing, and it’s something that investors have a lot of trouble doing,” Christopher says. “When the market is going up, they don’t want to sell. When it’s going down, they think they can wait it out. Rebalancing periodically is how you readjust your portfolio back to its original allocation, which can help you achieve attractive returns in this part of the cycle. It all comes back to buy low, sell high.”
  • Look to emerging market equities. Broadly speaking, these stocks have WFII’s most favorable outlook, with the potential to post improved earnings growth and better valuations through 2019. Fast-growing economies such as China, Mexico, and Brazil have grown less reliant on commodities or global or U.S. growth. Now, they are more tied to a growing middle class and business in domestic or other emerging markets. WFII expects to see some sort of trade deal between the U.S. and China, which would likely be a boon to the asset class, Christopher says. And there’s still room for more economic stimulus in these regions. “I wouldn’t bet against the Chinese government keeping their economy stable,” Christopher says. “Stability is a high political goal, and they’ve been proving naysayers wrong for 10 years.”

Mike Woelflein is a business and investment writer based in Yarmouth, Maine.

Inline images based on iStock.

Additional Resources

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Risk Considerations

The S&P 500 is a market capitalization weighted index composed of 500 stock generally considered representative of the U.S. stock market.  An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. 

All investing involves risk including the possible loss of principal.  Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss.  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. Stock markets, especially foreign markets, are volatile.  A stock’s value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  International investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.  These risks are heightened in emerging markets. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities.  Bonds are subject to market, interest rate, price, credit/default, call, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Cash Alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and may not keep pace with inflation over extended periods of time.