Markets & Strategies

Investment Outlook: How to Prepare for an Uncertain Second Half

A Wells Fargo Investment Institute strategist explains what today's uncertainty—both from the coronavirus outbreak and the fast-approaching U.S. elections—could mean for your investments.

by Mike Woelflein - May 25, 2020

As we reach the midpoint of 2020, much of the impact of the coronavirus outbreak on the economy, the markets, and the elections remains unknown. And in the 2020 election cycle, no one knows who will win the presidency or which party will control the House and Senate.

“Given the pullback we’ve seen, and the uncertainty we continue to face, our advice is to remain diligent and resilient,” says Paul Christopher, CFA, Head of Global Market Strategy at Wells Fargo Investment Institute (WFII). “Successful investing is about balancing risk and reward. There are still a lot of uncertainties about the novel coronavirus, but we see potential market opportunities to improve the balance between expected risk and return in portfolios.”

Here, Christopher shares his perspective on what investors could consider as we move forward.

Stick to your plan

In 2019, WFII recommended a conservative approach to both equities and fixed income.

Since then, WFII’s recommendations have become more conservative. The market’s sharp pullback in March confirmed the wisdom of that approach, Christopher says, because although virtually everything declined, quality assets proved more resilient.

“Being conservative doesn’t mean being passive or pulling out of the market into cash or gold,” he says. “It’s about being proactive: Follow your plan and stay disciplined, but make sure you’re managing risk wisely.”

Stay close to your long-term strategy

In the past, major U.S. elections have generally been good for investors. The S&P 500 has advanced in 19 of the 23 presidential election years since 1928, and three of the four declining years occurred during recessions. This year’s sudden and deep recession present a challenge to President Trump’s re-election bid, and the lockdowns across the country test former Vice President Biden’s ability to raise funds and reach voters.

Whatever the outcomes of the elections, they could dramatically affect key geopolitical issues that impact markets, including trade agreements, taxes, health care laws, and monetary policies. “There may be a temptation to speculate based on polls or news events, and what they could mean for a certain sector or stocks as a whole,” Christopher says. Widely differing trajectories for COVID-19 infection rates and the as-yet untested effects of ending the lockdowns affect everything from polls to fundraising to likely voters in November. “Long-term investors who want to look beyond the crisis through to a potential recovery should stick close to their long-term strategy and allocations. Investors who want to adjust to current opportunities should emphasize quality.”

Focus on quality stocks

Christopher says quality stocks tend to be backed by strong earnings growth, growing dividend payments or share buybacks, an excellent management team, lots of cash, and a sound balance sheet. Within bonds, quality tends to imply investment-grade, deemed less susceptible to default because they are backed by strong revenues, earnings, and credit payment history—and solid capital.

So where should you look for quality stocks? As the coronavirus outbreak has intensified, WFII downgraded international equities, because quarantines and containment measures have kept consumers from spending and have slowed business activity.

Our quality focus leads to favoring U.S. large- and mid-cap stocks. Mid-caps may offer similar or even better dividend yields than international equities, but they are more domestic and less exposed to the headwinds of a global slowdown or a strengthening dollar. Within fixed income, WFII currently recommends consideration of investment-grade, longer-duration U.S. corporate bonds, residential mortgage-backed securities, and preferred securities.

“We want the portfolio to grow over time, and we want to generate income, but what we really want—right now—is to minimize risk,” Christopher says. “Those recommendations are places where an investor might look to find lower-risk opportunities.”

Keep things balanced

Periodic rebalancing—resetting the portfolio to the long-term allocations—can reduce risk through volatile periods.

“Rebalance” has been WFII’s investing mantra. Most portfolios are based on a set of long-term, strategic asset allocations, such as 60% stocks and 40% bonds. The decade-plus equity bull market elevated the value of many stocks, which may have moved that 60/40 split closer to 80/20. (Learn more about considerations for adjusting your portfolio.)

Keep cash in your portfolio

There is a place for cash (and cash alternatives) in diversified portfolios—everything from a solid emergency fund to a temporary amount that you can reinvest when opportunities arise. Christopher’s advice is to use cash as a tool, not as a shield. In other words, don’t succumb to the temptation to flee into a very defensive, cash-heavy position.

“Whether all this uncertainty drives a recession or not, we know that historically we’ve always come out on the other side and the markets have rebounded,” Christopher says. “No one knows when that might happen this time, but I believe you want to position yourself for that, and all the years to follow.”

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

Additional Resources

Wells Fargo Investment Institute shares its forecast for the economy in its 2020 Midyear Outlook report.

What are five ways the coronavirus pandemic could impact investors?

What are key strategies for generating investment income when interest rates are low?

DISCLOSURES

Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Dividends are not guaranteed and are subject to change or elimination.  Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Preferred securities have special risks associated with investing. Preferred securities are subject to interest rate and credit risks.  Preferred securities are generally subordinated to bonds or other debt instruments in an issuer’s capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security. Mortgage-related and asset-backed securities are subject to prepayment risks.  Changes in prepayments may significantly affect yield, average life and expected maturity.

Definitions

An index is unmanaged and not available for direct investment.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

Investment Grade corporate bonds – A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s credit quality rating. ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc.) are considered low credit quality, and are commonly referred to as “junk bonds”.

General Disclosures

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.

Opinions represent WFII’s opinion as of the date of this report, are for general information purposes only, and are not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally. WFII does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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.