I hope you had a wonderful weekend! Today is National Peanut Butter Cookie Day. I suggest honoring the peanut butter cookie appropriately by having one for breakfast, lunch, and dinner.
LRPC’s Monday Morning Minute for this week, “5 Investment Tips For The Rest Of 2017 From Wells Fargo” (presented below) comes to you courtesy of ThinkAdvisor. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.
Believe it or not, we are nearly halfway through 2017. Check out below the investment tips that the experts from Wells Fargo are sharing for the second half of the year.
Have a wonderful week!
5 Investment Tips For The Rest Of 2017 From Wells Fargo
By Bernice Napach, Senior Writer, ThinkAdvisor
The best thing about Wells Fargo’s midyear market outlook may be what it forecasts won’t happen rather than what will. For example, it doesn’t expect a recession in the next 12 months, which is supportive for financial markets, but it does expect the S&P 500 index to end the year below current levels — 4% to 8% lower — and short-term and long-term interest rates to finish higher.
Wells Fargo’s year-end target for the S&P 500 is between 2,230 and 2,330 and for the federal funds rate between 1.25% and 1.50%, up 50 basis points from the current range. It expects two more Fed rate hikes this year. It also has a year-end target for the 10-year Treasury bond yield at somewhere between 2.25% and 2.75%, up from 2.17% currently, which is near a seven-month low.
“We are most assuredly past the midpoint,” wrote Darrell Cronk, Wells Fargo’s chief investment officer of Wealth and Investment Management in his letter to investors, referring to the economic recovery cycle, now in its ninth year. “However, we see few signs today that this cycle is in danger of imminently ending.”
Wells Fargo is forecasting 2.3% GDP growth and 2.4% inflation (for CPI) by year end, with WTI crude oil priced between $40 and $50 a barrel. (It’s currently just over $47.)
Proposed policy initiatives such as tax reform or an infrastructure spending plan are not expected to have much impact on the economy or markets because neither is anticipated before “late 2017 or early 2018 at the earliest.”
Wells Fargo’s midyear outlook, subtitled “Seize the Opportunities,” includes five portfolio investment tips for the second half of 2017, on top of the usual asset diversification and rebalancing, as follows:
1. Reduce exposure to U.S. equities, especially small-cap stocks, and high-yield bonds
Stock valuations are likely to contract because of Fed rate hikes, which is a reason to lighten up on equities, especially small caps, according to Wells Fargo. The firm also recommends against owning weaker bond credits, such as high yield, because of relatively tight yield spreads. “We prefer higher quality bonds at this point in the interest rate cycle, including U.S. taxable investment-grade bonds … [especially] intermediate-term bonds.”
2. Increase exposure to non-U.S. stocks
Many investors own large positions in U.S. stocks because they have outperformed international equities in four of the past five years, but that may not continue, according to the outlook. It recommends that investors increase exposure to overseas markets whose “fundamentals have improved,” such as developed markets in the Asia-Pacific region and developing markets, also in Asia. These include Australia, Hong Kong, Japan and Singapore (developed markets) and China, India, Indonesia, Malaysia, Philippines, South Korea, Taiwan, and Thailand (developing markets).
Wells Fargo is neutral on Europe and has an unfavorable view of emerging markets in Europe (Poland, Russia, and Turkey), the Middle East, Africa (South Africa) and South America (Brazil, Chile, Mexico).
3. Add nontraditional investments
Publicly traded real estate investment trusts (REITs) should benefit from increasing global demand for property, rising real estate prices and improving real estate investor confidence, according to the outlook. For financially sophisticated, qualified investors, it recommends investing with Relative Value managers, who can take advantage of retail-related distressed credit, and equity hedge fund managers, who use long and short strategies to take advantage of stock price dispersion and low correlations among asset classes.
4. Be agile with tactical shifts
Given expectations for low returns through the balance of the year, Wells Fargo recommends that investors be nimble, to take advantage of market mispricings and reduce risk. To those ends, it suggests incorporating tactical shifts in holdings, lasting six to 18 months, within longer-term allocations that last 10 to 15 years. The firm is currently slightly underweight risk assets because of forecasts for limited upside in several equity asset classes.
In the U.S., those assets include small-cap stocks as well as energy, utilities, and consumer staples shares. It’s overweight consumer discretionary, financials, health care and industrials and neutral on U.S. large-cap and midcap shares, developed markets excluding the U.S. and emerging markets.
5. Reconsider active/passive mix
Given its mediocre outlook for financial markets in the second half along with the Fed’s plans to reduce reserves as it begins to unwind previous monetary stimulus, the last of Wells Fargo’s investment tips stresses the importance of stock picking.
“Securities selection will be paramount to portfolio performance,” which favors active management over passive strategies.
The risk ahead
The Wells Fargo midyear outlook lists several risks that could upset its relatively mediocre outlook for financial markets in the second half. These include further flattening of the U.S. yield curve, which could reduce investors’ bond income as reflected by slower economic growth, or its opposite: faster than expected rate hikes, which would reduce demand for REITs. In addition, there are potential geopolitical risks and policy missteps such as tariffs on goods entering the U.S. and trade restrictions in Europe, especially Italy.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
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