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Key takeaways
Wells Fargo Investment Institute expects a recession in early 2023, recovery by midyear, and a rebound that gains strength into year-end.
We expect earnings to decline in 2023 but see equity market gains as investors anticipate a late-2023 to 2024 recovery.
We favor U.S. large-cap and U.S. mid-cap equities over international equities and remain tilted toward quality and defensive sectors.
We expect U.S. Treasury yields to decline in 2023 as we go through an economic recession and in anticipation of policy rate cuts from the Fed.
Top five portfolio ideas for 2023
Reconsider allocations
Reconsider portfolio allocations
As investors prepare for 2023, we believe now is an opportune time to reassess the balance between income and growth assets. Income-seeking investors during the past several years may have relied on a mix of dividend payouts, income from real estate and other assets, and coupons from fixed-income assets to support income needs. Now with a shift in the interest-rate environment, bonds are currently offering a more attractive source of income.
Positioning equities
Position equities for a moderate recession and second-half recovery
Heading into 2023, we prefer an underweight allocation to global stocks as the economy continues to slow, yet we do see opportunities to add to equity positions on the horizon.
Based on our view of a recession in early 2023, we advocate remaining defensively positioned in equities, favoring high-quality U.S. large-cap and mid-cap equities over small-cap and international equities and, in U.S. markets, the Information Technology, Health Care, and Energy sectors.
Lock in higher yields
Lock in higher-yielding bonds
Short-term fixed income is attractive today, with 12-month Treasury yields increasing from 0.1% a year ago to over 4.0%. If the Fed cuts rates next year as we expect, short-term rates should decline. We believe long-term yields are nearing peak levels and represent good value, so we prefer to add to longer-term bonds.
Resist market timing
Resist the urge to time the markets
Market timing involves moving all or a significant portion of a portfolio into or out of asset classes based on near-term market expectations. Unfortunately, such a strategy is nearly impossible to successfully accomplish.
Instead of timing the markets with large allocation changes, we prefer more modest tactical adjustments. Our guidance combines a quality approach in equities, a barbell between short- and long-term fixed-income assets, low-correlated alternative strategies, and commodities — for the longer supply-demand rebalancing in those markets.
Managing volatility
Managing volatility in uncertain markets
Market volatility was elevated in 2022, reflecting investor uncertainty in an environment where stocks and bonds moved in the same direction — an unusual market trend. The traditional portfolio with 60% in equities and 40% in fixed income (60/40 portfolio) did not provide its typical downside mitigation amidst a backdrop of higher inflation, rising interest rates, and expectations of a global recession.
However, a portfolio with broader diversification may have benefited from allocations to commodities and alternative investments.
Top five portfolio ideas for 2023
Reconsider portfolio allocations
As investors prepare for 2023, we believe now is an opportune time to reassess the balance between income and growth assets. Income-seeking investors during the past several years may have relied on a mix of dividend payouts, income from real estate and other assets, and coupons from fixed-income assets to support income needs. Now with a shift in the interest-rate environment, bonds are currently offering a more attractive source of income.
Positioning equities
Position equities for a moderate recession and second-half recovery
Heading into 2023, we prefer an underweight allocation to global stocks as the economy continues to slow, yet we do see opportunities to add to equity positions on the horizon.
Based on our view of a recession in early 2023, we advocate remaining defensively positioned in equities, favoring high-quality U.S. large-cap and mid-cap equities over small-cap and international equities and, in U.S. markets, the Information Technology, Health Care, and Energy sectors.
Lock in higher yields
Lock in higher-yielding bonds
Short-term fixed income is attractive today, with 12-month Treasury yields increasing from 0.1% a year ago to over 4.0%. If the Fed cuts rates next year as we expect, short-term rates should decline. We believe long-term yields are nearing peak levels and represent good value, so we prefer to add to longer-term bonds.
Resist market timing
Resist the urge to time the markets
Market timing involves moving all or a significant portion of a portfolio into or out of asset classes based on near-term market expectations. Unfortunately, such a strategy is nearly impossible to successfully accomplish.
Instead of timing the markets with large allocation changes, we prefer more modest tactical adjustments. Our guidance combines a quality approach in equities, a barbell between short- and long-term fixed-income assets, low-correlated alternative strategies, and commodities — for the longer supply-demand rebalancing in those markets.
Managing volatility
Managing volatility in uncertain markets
Market volatility was elevated in 2022, reflecting investor uncertainty in an environment where stocks and bonds moved in the same direction — an unusual market trend. The traditional portfolio with 60% in equities and 40% in fixed income (60/40 portfolio) did not provide its typical downside mitigation amidst a backdrop of higher inflation, rising interest rates, and expectations of a global recession.
However, a portfolio with broader diversification may have benefited from allocations to commodities and alternative investments.
Asset class guidance
Economy
A year of global economic transitions
Wells Fargo Investment Institute expects the U.S. and global economies to face a moderate recession through the summer in 2023 followed by a second-half recovery capable of extending into 2024.
Our view is that inflation’s noticeable decline will be the other dominant theme in 2023, shaping the trajectory of economic growth and interest rates.
A deeper or longer recession could result in the unlikely event that inflation stays higher for longer or that the Fed overshoots with its interest-rate hikes.
WFII forecasts
Average % change from the same period a year ago, unless otherwise noted.
|
Latest |
2023 target |
|
|---|---|---|
|
U.S. GDP growth |
3.3% (period ending Q3) |
-1.3% |
|
U.S. inflation1 |
7.7% (Oct.) |
2.2% (Dec.) |
|
U.S. unemployment rate2 |
3.6% (Oct.) |
5.2% (Dec.) |
|
Sources: Bloomberg and Wells Fargo Investment Institute, as of November 30, 2022. The targets for 2023 are based on forecasts by Wells Fargo Investment Institute as of December 6, 2022. GDP = Gross Domestic Product. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
|
Fixed Income
Sharp U-turn ahead
We believe the Fed will pivot away from raising borrowing costs in 2023 after signs that inflation is waning and a recession has taken hold. The Fed will play a key role as it begins to cut policy rates in the second half of the year to aid the economic recovery.
We expect U.S. Treasury yields to decline in 2023 during the economic recession and as investors anticipate eventual rate cuts from the Fed.
Long-term yields tend to peak before the Fed finishes raising rates. We favor remaining nimble in bond portfolio allocations with a barbell strategy that lengthens maturities but also takes advantage of ultra-short-term yields.
WFII forecasts
|
2022 latest* |
2023 year-end target |
|
|---|---|---|
|
Federal funds rate |
3.75%-4.00% |
3.50%-3.75% |
|
10-year U.S. Treasury yield |
3.64% |
3.50%-4.00% |
|
30-year U.S. Treasury yield |
3.76% |
3.50%-4.00% |
|
Sources: Wells Fargo Investment Institute and Bloomberg, December 6, 2022. *Latest economic and market data as of November 30, 2022. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. Past performance is no guarantee of future results. |
Equities
Stay with quality until broader opportunities emerge
We expect earnings to contract in 2023 as the recession leads to declining revenues and profit margins. Valuations should rebound in 2023 to lift equity markets by year-end as early-cycle dynamics begin to take hold.
We continue to favor higher-quality U.S. large-cap and mid-cap equities over small-cap equities and international equities. This defensive positioning likely will benefit investors early in the recession. However, equity markets are forward-looking and should begin pricing in a recovery before the recession ends.
International equity markets face headwinds that ultimately keep us less favorable compared with U.S. equities through 2023.
WFII forecasts
|
2022 latest* |
2023 year-end target |
|
|---|---|---|
|
S&P 500 Index |
4,080 |
4,300-4,500 |
|
MSCI EAFE Index |
1,945 |
1,700-1,900 |
|
Sources: Wells Fargo Investment Institute and Bloomberg, December 6, 2022. *Latest economic and market data as of November 30, 2022. An index is not managed and not available for direct investment. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. Past performance is no guarantee of future results. |
Real assets
Commodity future still looks bright
Commodities have had a strong two-year run, and we expect more gains in 2023 as many commodities remain structurally undersupplied.
Oil prices are likely on track for another positive year, driven by production challenges and strategic opportunities in large oil-producing countries.
While the commodity bull super-cycle has us positive on Commodities generally, we are neutral on the Precious Metals sector, which includes gold.
WFII forecasts
|
2022 latest* |
2023 year-end target |
|
|---|---|---|
|
West Texas Intermediate crude (barrel) |
$80 |
$100-$120 |
|
Gold (troy ounce) |
$1,769 |
$1,900-$2,000 |
|
Sources: Wells Fargo Investment Institute and Bloomberg, December 6, 2022. *Latest economic and market data as of November 30, 2022. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. Past performance is no guarantee of future results. |
Alternative investments
Opportunities in alternative investments
Late cycle is an opportune time to allocate to alternative investment strategies that have low correlation to equities and fixed income in our view.
Our cyclical guidance for the Global Macro and Relative Value strategies remains favorable. We believe both strategies are likely to benefit from a shifting collection of persistent market dislocations and longer-term secular trends.
For investors with longer-term investment horizons, we maintain our neutral view of private capital strategies, including Private Equity, Private Debt, and Private Real Estate.
Alternative investments are not appropriate for all investors and are only open to “accredited investors” or “qualified investors” within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and designed for long-term investment and not as trading vehicles.
Asset class guidance
A year of global economic transitions
Wells Fargo Investment Institute expects the U.S. and global economies to face a moderate recession through the summer in 2023 followed by a second-half recovery capable of extending into 2024.
Our view is that inflation’s noticeable decline will be the other dominant theme in 2023, shaping the trajectory of economic growth and interest rates.
A deeper or longer recession could result in the unlikely event that inflation stays higher for longer or that the Fed overshoots with its interest-rate hikes.
WFII forecasts
Average % change from the same period a year ago, unless otherwise noted.
|
Latest |
2023 target |
|
|---|---|---|
|
U.S. GDP growth |
3.3% (period ending Q3) |
-1.3% |
|
U.S. inflation1 |
7.7% (Oct.) |
2.2% (Dec.) |
|
U.S. unemployment rate2 |
3.6% (Oct.) |
5.2% (Dec.) |
|
Sources: Bloomberg and Wells Fargo Investment Institute, as of November 30, 2022. The targets for 2023 are based on forecasts by Wells Fargo Investment Institute as of December 6, 2022. GDP = Gross Domestic Product. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
|
Fixed Income
Fixed Income
Sharp U-turn ahead
We believe the Fed will pivot away from raising borrowing costs in 2023 after signs that inflation is waning and a recession has taken hold. The Fed will play a key role as it begins to cut policy rates in the second half of the year to aid the economic recovery.
We expect U.S. Treasury yields to decline in 2023 during the economic recession and as investors anticipate eventual rate cuts from the Fed.
Long-term yields tend to peak before the Fed finishes raising rates. We favor remaining nimble in bond portfolio allocations with a barbell strategy that lengthens maturities but also takes advantage of ultra-short-term yields.
WFII forecasts
|
2022 latest* |
2023 year-end target |
|
|---|---|---|
|
Federal funds rate |
3.75%-4.00% |
3.50%-3.75% |
|
10-year U.S. Treasury yield |
3.64% |
3.50%-4.00% |
|
30-year U.S. Treasury yield |
3.76% |
3.50%-4.00% |
|
Sources: Wells Fargo Investment Institute and Bloomberg, December 6, 2022. *Latest economic and market data as of November 30, 2022. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. Past performance is no guarantee of future results. |
Equities
Stay with quality until broader opportunities emerge
We expect earnings to contract in 2023 as the recession leads to declining revenues and profit margins. Valuations should rebound in 2023 to lift equity markets by year-end as early-cycle dynamics begin to take hold.
We continue to favor higher-quality U.S. large-cap and mid-cap equities over small-cap equities and international equities. This defensive positioning likely will benefit investors early in the recession. However, equity markets are forward-looking and should begin pricing in a recovery before the recession ends.
International equity markets face headwinds that ultimately keep us less favorable compared with U.S. equities through 2023.
WFII forecasts
|
2022 latest* |
2023 year-end target |
|
|---|---|---|
|
S&P 500 Index |
4,080 |
4,300-4,500 |
|
MSCI EAFE Index |
1,945 |
1,700-1,900 |
|
Sources: Wells Fargo Investment Institute and Bloomberg, December 6, 2022. *Latest economic and market data as of November 30, 2022. An index is not managed and not available for direct investment. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. Past performance is no guarantee of future results. |
Real assets
Commodity future still looks bright
Commodities have had a strong two-year run, and we’re expecting more gains in 2023 as many commodities remain structurally undersupplied.
Oil prices are likely on track for another positive year, driven by production challenges and strategic opportunities in large oil-producing countries.
While the commodity bull super-cycle has us positive on Commodities generally, we are neutral on the Precious Metals sector, which includes gold.
WFII forecasts
|
2022 latest* |
2023 year-end target |
|
|---|---|---|
|
West Texas Intermediate crude (barrel) |
$80 |
$100-$120 |
|
Gold (troy ounce) |
$1,769 |
$1,900-$2,000 |
|
Sources: Wells Fargo Investment Institute and Bloomberg, December 6, 2022. *Latest economic and market data as of November 30, 2022. Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change. Past performance is no guarantee of future results. |
Alternative investments
Alternative investments
Opportunities in alternative investments
Late cycle is an opportune time to allocate to alternative investment strategies that have low correlation to equities and fixed income in our view.
Our cyclical guidance for the Global Macro and Relative Value strategies remains favorable. We believe both strategies are likely to benefit from a shifting collection of persistent market dislocations and longer-term secular trends.
For investors with longer-term investment horizons, we maintain our neutral view of private capital strategies, including Private Equity, Private Debt, and Private Real Estate.
Alternative investments are not appropriate for all investors and are only open to “accredited investors” or “qualified investors” within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and designed for long-term investment and not as trading vehicles.
Wondering what to expect in 2023?
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- Details on favored asset classes and sectors
- Deeper dives into market sectors
- More information to help guide your investment decisions
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Download the full reportGet more WFII research and analysisDefinitions
S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value.
MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure equity market performance across 21 developed market countries excluding the U.S. and Canada.
Disclosures
Risk considerations
Forecasts, targets, and estimates are based on certain assumptions and our current views of market and economic conditions, which are subject to change.
All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. 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.
General market risks
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 and frontier markets. Investing in small- and mid-cap companies involves additional risks, such as limited liquidity and greater volatility.
Investments in fixed-income securities, including municipal securities, are subject to market, interest rate, credit, liquidity, inflation, prepayment, extension, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in a decline in the bond’s price. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. Municipal securities may also be subject to the alternative minimum tax and legislative and regulatory risk, which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.
U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest if held to maturity. Although free from credit risk, they are subject to interest rate risk.
Sector investing
Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Information Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Real estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.
Alternative investments
Alternative investments, such as hedge funds, private equity/private debt, and private real estate funds are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, and less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt, and private real estate fund investing involve other material risks, including capital loss and the loss of the entire amount invested. A fund’s offering documents should be carefully reviewed prior to investing.
Private debt strategies seek to actively improve the capital structure of a company, often through debt restructuring and deleveraging measures. Such investments are subject to potential default, limited liquidity, the creditworthiness of the private company, and the infrequent availability of independent credit ratings for private companies. Investing in distressed companies is speculative and involves a high degree of risk. Because of their distressed situation, these securities may be illiquid, have low trading volumes, and be subject to substantial interest rate and credit risks. Private capital investments are complex, speculative investment vehicles not appropriate for all investors. They are not subject to the same regulatory requirements as registered investment products and engage in leverage and other aggressive investment practices. There is often limited (or even nonexistent) liquidity and a lack of transparency regarding the underlying assets.
Hedge fund strategies, such as Event Driven, Equity Hedge, Global Macro, Relative Value, Structured Credit, and Long/Short Credit, may expose investors to the risks associated with the use of short selling, leverage, derivatives, and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential because the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage, which can magnify volatility and may entail other risks, such as market, interest rate, credit, counterparty, and management risks. Private capital investments are complex, speculative investment vehicles not appropriate for all investors. They are not subject to the same regulatory requirements as registered investment products and engage in leverage and other aggressive investment practices. There is often limited (or even nonexistent) liquidity and a lack of transparency regarding the underlying assets.
Real assets
Real assets are subject to the risks associated with real estate, commodities, and other investments and may not be appropriate for all investors. The commodities markets, including investments in gold and other precious metals, are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value, which may result in greater share price volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies, which may expose investors to additional risks. Investment in real estate securities includes risks, such as the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.
Disclosures
Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII. Opinions represent GIS’ opinion as of the date of this report; are for general informational purposes only; and are not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally. GIS 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 or best interest 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.
Wells Fargo Wealth and Investment Management, a division within the Wells Fargo & Company enterprise, provides financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Brokerage products and services offered through Wells Fargo Clearing Services, LLC, a registered broker-dealer and nonbank affiliate of Wells Fargo & Company. Bank products are offered through Wells Fargo Bank, N.A.
Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services accounts with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions, or communications made with Wells Fargo Advisors.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and nonbank affiliates of Wells Fargo & Company.
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