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Key takeaways
Wells Fargo Investment Institute anticipates a continued global economic slowdown, followed by a gradual U.S.-led recovery in the latter part of 2024.
We expect global earnings to be challenged in early 2024 before rebounding later in the year as the economy reaccelerates.
In equities, we prefer U.S. large caps over mid caps and small caps, and we favor developed-markets over emerging-markets.
We expect U.S. Treasury yields to remain volatile in 2024, declining early on as the economic slowdown gathers momentum, but rising as the recovery evolves in the latter months of the year.
Top five portfolio ideas for 2024
Stay defensive
Prepare for early-cycle recovery
As we move into 2024, we still favor more defensive positioning among and within asset groups. Overall, our portfolio guidance favors fixed income over equities, especially as short-term interest rates should hold up for longer as inflation remains sticky. In addition, we remain overweight commodities, an asset class we believe will gain further under private- and public-infrastructure building.
We favor rebalancing as a tool to help manage portfolio risk and seek higher returns over time.
Anticipate a pivot
Expect opportunities in riskier asset classes
Looking ahead, we anticipate that the economic slowdown will weigh on equity markets, allowing for a potential pivot toward investments that we believe are most likely to benefit from the subsequent recovery. These tend to be assets that are more leveraged to the economic cycle, such as small-cap and emerging-market equities, as well as high-yield debt.
Our preferred equity sector positioning likely would follow suit with its own risk-on tilt toward more cyclical and growth sectors.
Lock in yields
Lock in attractive long-term bond yields
A fundamental reason for holding fixed-income assets in a diversified portfolio is their historical ability to moderate risks in equity markets while contributing income.
The 10-year U.S. Treasury yield excluding core inflation (as measured by the Consumer Price Index (CPI) excluding food and energy) turned positive in September 2023, and we favor taking U.S. Long-Term Taxable Fixed Income up to strategic or long-term target allocations, to lock in yields as the continued slowdown pushes yields even lower. As long as the bond is from a high-quality issuer, an investor can lock in a known yield out to the maturity date with limited default risk.
Diversify with alternatives
Position for potential correlation spikes
Asset class prices can suddenly and sharply move together when affected by a common factor. This phenomenon has occurred several times over the past few years as inflation and the Federal Reserve’s (Fed) interest-rate countermeasures have moved equity and fixed-income prices up and down together.
These co-movements make a tricky environment for investors as portfolios may temporarily offer limited downside price protection until the longer-term diversification benefits reassert themselves, likely as the economic slowdown reaches its trough in 2024. One way to gain additional diversification is to add exposure to alternative strategies that not only offer the potential to enhance returns but also can help diversify a variety of risks, including market and inflation risk.
Consider commodities
Use pullbacks to add to commodities
Supply constraints and demand growth traditionally have been the principal drivers of long-term price gains. We anticipate both dynamics to continue for the foreseeable future, supporting commodity prices as demand picks up but supplies need more time to balance with demand.
Although performance may moderate as a weakening economy softens demand in cyclically sensitive sectors, at just three years into what we believe will be a multi-year uptrend, we see more upside potential ahead. Any pullback in commodity prices in 2024 may offer opportunities for investors to add exposure to the asset class at a reasonable cost.
Top five portfolio ideas for 2023
Prepare for early-cycle recovery
As we move into 2024, we still favor more defensive positioning among and within asset groups. Overall, our portfolio guidance favors fixed income over equities, especially as short-term interest rates should hold up for longer as inflation remains sticky. In addition, we remain overweight commodities, an asset class we believe will gain further under private- and public-infrastructure building.
We favor rebalancing as a tool to help manage portfolio risk and seek higher returns over time.
Anticipate a pivot
Expect opportunities in riskier asset classes
Looking ahead, we anticipate that the economic slowdown will weigh on equity markets, allowing for a potential pivot toward investments that we believe are most likely to benefit from the subsequent recovery. These tend to be assets that are more leveraged to the economic cycle, such as small-cap and emerging-market equities, as well as high-yield debt.
Our preferred equity sector positioning likely would follow suit with its own risk-on tilt toward more cyclical and growth sectors.
Lock in yields
Lock in attractive long-term bond yields
A fundamental reason for holding fixed-income assets in a diversified portfolio is their historical ability to moderate risks in equity markets while contributing income.
The 10-year U.S. Treasury yield excluding core inflation (as measured by the Consumer Price Index (CPI) excluding food and energy) turned positive in September 2023, and we favor taking U.S. Long-Term Taxable Fixed Income up to strategic or long-term target allocations, to lock in yields as the continued slowdown pushes yields even lower. As long as the bond is from a high-quality issuer, an investor can lock in a known yield out to the maturity date with limited default risk.
Diversify with alternatives
Position for potential correlation spikes
Asset class prices can suddenly and sharply move together when affected by a common factor. This phenomenon has occurred several times over the past few years as inflation and the Federal Reserve’s (Fed) interest-rate countermeasures have moved equity and fixed-income prices up and down together.
These co-movements make a tricky environment for investors as portfolios may temporarily offer limited downside price protection until the longer-term diversification benefits reassert themselves, likely as the economic slowdown reaches its trough in 2024. One way to gain additional diversification is to add exposure to alternative strategies that not only offer the potential to enhance returns but also can help diversify a variety of risks, including market and inflation risk.
Consider commodities
Use pullbacks to add to commodities
Supply constraints and demand growth traditionally have been the principal drivers of long-term price gains. We anticipate both dynamics to continue for the foreseeable future, supporting commodity prices as demand picks up but supplies need more time to balance with demand.
Although performance may moderate as a weakening economy softens demand in cyclically sensitive sectors, at just three years into what we believe will be a multi-year uptrend, we see more upside potential ahead. Any pullback in commodity prices in 2024 may offer opportunities for investors to add exposure to the asset class at a reasonable cost.
Asset class guidance
Economy
Preparing for the economic turning point
We anticipate a continued global economic slowdown, followed by a gradual U.S.-led recovery in the latter part of 2024.
Our view is that the economic slowdown will cool consumer spending and inflation. Once inflation falls below wage growth, households should recapture purchasing power. Also, as inflation falls closer to the Fed’s 2% target, we expect that policymakers will cut short-term interest rates, reducing borrowing costs for households and businesses. Lower interest rates and households with new purchasing power should prompt spending, inventory rebuilding, and an economic recovery, at least into year-end 2024, and probably beyond.
|
2023 latest* |
2024 target |
|
|---|---|---|
|
U.S. GDP growth1 |
1.9% (Q3) |
1.3% |
|
U.S. inflation2 |
3.2% (Oct.) |
2.8% (Dec.) |
|
U.S. unemployment rate3 |
3.8% (Oct.) |
4.7% (Dec.) |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest economic data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Q3 = third quarter. GDP = gross domestic product. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.
|
Fixed Income
A tale of two halves
We believe the Fed will pivot away from tightening monetary policy in 2024 and will most likely remain on pause in the early months of the year, but we expect modest policy rate cuts as the U.S. economy slows further.
In our view, 2024 will be a tale of two halves for fixed income: a decline in yields during the early part of the year as the economic slowdown deepens, followed by a climb in yields in the latter months as a recovery evolves. We see an opportunity for many defensive fixed-income asset classes to produce positive returns in the first half of 2024, and as the economy recovers, we look to add to higher-risk bond-market sectors such as high-yield bonds.
|
2023 latest* |
2024 year-end target |
|
|---|---|---|
|
Federal funds rate |
5.25% – 5.50% |
4.50% – 4.75% |
|
10-year U.S. Treasury yield |
4.33% |
4.25% – 4.75% |
|
30-year U.S. Treasury yield |
4.50% |
4.50% – 5.00% |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest market data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. |
Equities
Prioritize quality until the economy turns
We expect global earnings to be challenged in early 2024 before rebounding later in the year as the economy reaccelerates. Valuations likely will increase in 2024 as markets anticipate an earnings recovery into 2025.
We favor quality and a more defensive posture within equities as earnings per share (EPS) decelerate and the economy slows. As a result, we prefer U.S. large-caps over mid-caps and small-caps, as well as developed-market over emerging-market equities. Health Care, Industrials, Materials, and Energy are our favored sectors, while we hold unfavorable ratings on Consumer Discretionary, Financials, and Real Estate.
|
2023 latest* |
2024 year-end target |
|
|---|---|---|
|
S&P 500 Index |
4,567 |
4,800 – 5,000 |
|
MSCI EAFE Index |
2,123 |
2,200 – 2,400 |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest market data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. An index is unmanaged and not available for direct investment. |
Real assets
Commodity bull intact, but gains slow
Commodity price gains have slowed recently, but we remain favorable as the commodity bull super-cycle is intact, in our view. (Bull super-cycles are extended periods of time, historically 15-20 years, where commodity prices move upward together.) As the economy slows further, commodity prices are likely to consolidate in early 2024, but we expect a resumption in the rally by year-end.
Real estate investment trust (REIT) headwinds remain strong as we enter 2024, which keeps us unfavorable relative to other S&P 500 sectors.
|
2023 latest* |
2024 year-end target |
|
|---|---|---|
|
West Texas Intermediate crude (barrel) |
$75 |
$85 – $95 |
|
Gold (troy ounce) |
$2,036 |
$2,100 – $2,200 |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest market data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. |
Alternative investments
Tread with caution before a visible recovery
The 2024 alternative investment playbook remains defensively oriented as we maintain favorable ratings on strategies that we believe offer greater diversification benefits or may have the potential to generate positive returns regardless of market direction.
Although financial distress levels have remained moderate thus far, we believe the uptrend will resume in the coming quarters and present a robust opportunity set for Distressed Credit strategies (both hedge fund and private capital funds). Global Macro and Relative Value strategies typically do not move in lockstep with traditional equity and fixed-income markets and may provide an opportunity to diversify if traditional markets turn volatile.
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
Preparing for the economic turning point
We anticipate a continued global economic slowdown, followed by a gradual U.S.-led recovery in the latter part of 2024.
Our view is that the economic slowdown will cool consumer spending and inflation. Once inflation falls below wage growth, households should recapture purchasing power. Also, as inflation falls closer to the Fed’s 2% target, we expect that policymakers will cut short-term interest rates, reducing borrowing costs for households and businesses. Lower interest rates and households with new purchasing power should prompt spending, inventory rebuilding, and an economic recovery, at least into year-end 2024, and probably beyond.
|
2023 latest* |
2024 target |
|
|---|---|---|
|
U.S. GDP growth1 |
1.9% (Q3) |
1.3% |
|
U.S. inflation2 |
3.2% (Oct.) |
2.8% (Dec.) |
|
U.S. unemployment rate3 |
3.8% (Oct.) |
4.7% (Dec.) |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest economic data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Q3 = third quarter. GDP = gross domestic product. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.
|
Fixed Income
Fixed Income
A tale of two halves
We believe the Fed will pivot away from tightening monetary policy in 2024 and will most likely remain on pause in the early months of the year, but we expect modest policy rate cuts as the U.S. economy slows further.
In our view, 2024 will be a tale of two halves for fixed income: a decline in yields during the early part of the year as the economic slowdown deepens, followed by a climb in yields in the latter months as a recovery evolves. We see an opportunity for many defensive fixed-income asset classes to produce positive returns in the first half of 2024, and as the economy recovers, we look to add to higher-risk bond-market sectors such as high-yield bonds.
|
2023 latest* |
2024 year-end target |
|
|---|---|---|
|
Federal funds rate |
5.25% – 5.50% |
4.50% – 4.75% |
|
10-year U.S. Treasury yield |
4.33% |
4.25% – 4.75% |
|
30-year U.S. Treasury yield |
4.50% |
4.50% – 5.00% |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest market data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. |
Equities
Prioritize quality until the economy turns
We expect global earnings to be challenged in early 2024 before rebounding later in the year as the economy reaccelerates. Valuations likely will increase in 2024 as markets anticipate an earnings recovery into 2025.
We favor quality and a more defensive posture within equities as earnings per share (EPS) decelerate and the economy slows. As a result, we prefer U.S. large-caps over mid-caps and small-caps, as well as developed-market over emerging-market equities. Health Care, Industrials, Materials, and Energy are our favored sectors, while we hold unfavorable ratings on Consumer Discretionary, Financials, and Real Estate.
|
2023 latest* |
2024 year-end target |
|
|---|---|---|
|
S&P 500 Index |
4,567 |
4,800 – 5,000 |
|
MSCI EAFE Index |
2,123 |
2,200 – 2,400 |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest market data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. An index is unmanaged and not available for direct investment. |
Real assets
Commodity bull intact, but gains slow
Commodity price gains have slowed recently, but we remain favorable as the commodity bull super-cycle is intact, in our view. (Bull super-cycles are extended periods of time, historically 15-20 years, where commodity prices move upward together.) As the economy slows further, commodity prices are likely to consolidate in early 2024, but we expect a resumption in the rally by year-end.
Real estate investment trust (REIT) headwinds remain strong as we enter 2024, which keeps us unfavorable relative to other S&P 500 sectors.
|
2023 latest* |
2024 year-end target |
|
|---|---|---|
|
West Texas Intermediate crude (barrel) |
$75 |
$85 – $95 |
|
Gold (troy ounce) |
$2,036 |
$2,100 – $2,200 |
|
Sources: Wells Fargo Investment Institute and Bloomberg. *Latest market data as of November 30, 2023. Targets for 2024 are based on forecasts by Wells Fargo Investment Institute as of January 9, 2024. Forecasts, targets, and estimates are based on certain assumptions and on our current views of market and economic conditions, which are subject to change. |
Alternative investments
Alternative investments
Tread with caution before a visible recovery
The 2024 alternative investment playbook remains defensively oriented as we maintain favorable ratings on strategies that we believe offer greater diversification benefits or may have the potential to generate positive returns regardless of market direction.
Although financial distress levels have remained moderate thus far, we believe the uptrend will resume in the coming quarters and present a robust opportunity set for Distressed Credit strategies (both hedge fund and private capital funds). Global Macro and Relative Value strategies typically do not move in lockstep with traditional equity and fixed-income markets and may provide an opportunity to diversify if traditional markets turn volatile.
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.
Definitions
MSCI EAFE Index (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
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.
An index is unmanaged and not available for direct investment.
Disclosures
Risk considerations
Forecasts and targets are based on certain assumptions and on our current views of market and economic conditions, which are subject to change.
All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful and meet its investment objectives. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss. Each asset class has its own risk and return characteristics, which should be evaluated carefully before making any investment decision. 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. Some of the risks associated with the representative asset classes include:
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 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.
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. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.
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.
Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players, reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment.
The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions.
Investing in the Financial services companies will subject a investment to adverse economic or regulatory occurrences affecting the sector.
Some of the risks associated with investment in the
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.
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. Other risks associated with investing in listed REITs include the use of leverage, unexpected reductions in common dividends, increases in property taxes, and the impact to listed REITs from new property development.
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 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.
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