Professional Documents
Culture Documents
Economy
U.S. equities
International
Alternative investments
Despite a disappointing
2014, we believe 2015 shows
promise.
Forecasts and
recommendations in
this report are produced
by analysts and strategists
on the Wells Fargo Advisors
Investment Strategy
Committee.
Economy
Inflation-adjusted GDP
Inflation-adjusted GDP
Unemployment
CPI inflation
Federal deficit
Existing home sales (SAAR*)
Total vehicle sales (SAAR*)
U.S. equity
S&P 500 index
S&P operating earnings
S&P 500 price/earnings
2014 latest
2.3% 1
3.5% 1
5.8% 2
1.7% 2
$0.5 tril. 2
5.3 mil. 2
16.4 mil. 2
2.8%
5.4%
1.8%
$0.4 tril.
5.8 mil.
17.5 mil.
2014 latest
2,048.72
$117.00/shr.
17.5
2,150-2,250
$128.00/shr.
17.2
2014 latest
0.09%
2.36%
3.08%
0.75%
3.00%-3.50%
3.50%-4.00%
2014 latest
1,820.89
989.91
$74.58
$1,182.72
$1.26
1,950-2,050
1,050-1,130
$88.00-$92.00
$1,050-$1,150
$1.22-$1.26
Asset classes
Overweight
Evenweight
Underweight
Cash alternatives
Commodities
Emerging-market stocks
High-yield securities
Intermediate-term IG bonds
International emerging market fixed income
REITs
Short-term IG bonds
U.S. equity
We expect the U.S. stock market will continue to trend higher in 2015.
The U.S. economic expansion could continue for several more years as there
is good news when looking at consumer and business finances, U.S. crude
oil production, and overall economic performance.
International
10
A slow transition
We expect the Fed will begin increasing short-term interest rates during
the summer of 2015.
The world economy and international markets are likely to improve in 2015,
helped by a strengthening U.S. economy, lower energy prices, subdued
inflation, and international government stimulus.
Short-term rates should increase with greater velocity than long-term rates,
causing the yield curve to flatten.
We strongly advise investors to avoid overconcentration to any particular risk.
A balanced position should generate acceptable performance while limiting
risk and allowing for allocations to be adjusted if volatility increases.
Alternative investments
12
A brighter tomorrow?
For 2015, strategies that focus on buying and selling domestic stocks should
gain from the increased volatility we anticipate.
Event driven and private capital strategies should do well as a result of
strong corporate balance sheets and increased demand for more innovative
lending solutions.
For the long term, we continue to believe diversifying alternative investment
holdings may be the best way to benefit from a variety of strategies that tend
to do well under diverse economic circumstances.
Economy
2015 year-end
forecasts
2.
8
inflation-adjusted GDP
Rolling four quarters
5.4 unemployment
End of year
Already on a rebound,
consumer confidence
is likely to improve further.
125
100
75
50
95
00
05
10
15
Sources: The Conference Board, Haver Analytics, and Wells Fargo Advisors
$400
Billions
$0
$-400
$-800
$-1,200
Recessions
$-1,600
95
00
05
10
15
U.S. equities
2015 year-end
forecasts
128.00
2,150-2,250
S&P 500 index
Source: Wells Fargo Advisors
Overweight*
Evenweight*
Underweight*
Consumer Discretionary
Industrials
Information Technology
Energy
Financials
Health Care
Materials
Telecommunication
Consumer Staples
Utilities
40%
30%
20%
10%
0%
-10%
1
11
13
15
17
19
21
23
25
27
29
31
33
35
A slow transition
Investors may need to rethink strategies in light of probable Fed policy changes
2015 year-end
forecasts
Fed impact
0.75
target federal
3.
00 -3.50
10-year Treasury yield
We expect the Fed to take a measured and datadependent approach that may result in long pauses
between incremental increases in short-term rate
policy, at least initially. Such an approach has the
funds rate
3.50
-4.00
30-year Treasury yield
Overweight
Slight
overweight
Evenweight
Slight
underweight
Agency securities
U.S. Treasuries
Underweight
Duration
Slightly short*
Corporate bonds
Mortgage-backed
securities
Municipal bonds
Preferred securities
Treasury InflationProtected Securities
See page 14 for duration definition.
*We recommend a duration slightly short of an investors target duration. If an investor does not have a target duration, we recommend
a duration of approximately 4.75 years in taxable portfolios and 7.25 years for tax-exempt portfolios.
n
tte
fla
s
ttens
Curve fla
rve
100
Cu
200
20%
se
s ri
e
Rat
Rates rise
10%
5%
Rat
e
-100
s ris
e
15%
300
25%
flatten
400
Curve
-200
0%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Past performance is not an indication of future results.
A flattening curve
The interest rate curve flattened significantly in
other periods in which the Fed increased the federal
funds target rate. The flattening often occurred over
a number of years, with the two-year Treasury yield
moving above the 10-year Treasury yield by the end
of each of the last three tightening cycles. We think
the current cycle will likely follow a similar path,
although we expect the curve flattening to be drawn
out and occur over a number of years; investors
should not fear that the current expansionary
economic phase is nearing an end.
International
2015 year-end
forecasts
1,950-2,050
MSCI EAFE equity index
1,050-1,130
MSCI Emerging-market
equity index
88.00- 92.00
1,050- 1,150
1.22- 1.26
As of December 2, 2014
Asset class
Core
Satellites
10
100%
80%
60%
40%
20%
0%
Jan.
Feb.
Mar.
Apr.
May
Jun.
Jul.
Aug.
Sep.
Oct.
11
Alternative investments
A brighter tomorrow?
Despite a disappointing 2014, we believe 2015 shows promise
Renewed bouts of market volatility, policy
uncertainty at home and abroad, and muted returns
across most global asset classes weighed on
alternative strategies total returns in 2014. However,
while alternative strategy performance on average
struggled, pockets of solid individual manager and
strategy performance could be found, particularly
within U.S. equity and more macro focused
approaches.
Unfortunately, for a broader majority of alternative
fund managers, geopolitical turmoil and global
growth concerns continued to influence broad
investor sentiment and markets in unpredictable
ways, making the positive outliers more the
exception than the rule.
However, despite many muted performances in
2014, we continue to believe that going forward the
longer-term value proposition for incorporating
alternatives remains in place particularly given our
belief that the Fed will become relatively less
accommodative in 2015, and correspondingly,
financial asset prices will experience greater
gyrations as market participants become more
cautious.
Alternative strategies can provide enhanced
diversification during such potential bouts of
volatility, while also creating longer-term investment
portfolio return opportunities, as flexible alternative
managers attempt to exploit the distortions in global
asset prices such events create.
12
Asset allocation
Income
Conservative
Mid-cap equity 2%
Large-cap equity 2%
REIT equity 3%
High-yield fixed income 4%
International
fixed income* 8%
Moderate
2% International equity
5% Cash alternatives
4% International equity
3% Cash alternatives
Small-cap equity 2%
Mid-cap equity 2%
Mid-cap equity 4%
REIT equity 3%
Mid-cap equity 4%
Small-cap equity 6%
Moderate income
Small-cap equity 4%
50%
Traditional
fixed income
27%
Large-cap
equity
2% Cash alternatives
Cash alternatives 2%
Small-cap equity 8%
3% Cash alternatives
29%
Traditional
fixed income
22%
Large-cap
equity
Commodities 3%
17% International
fixed income*
Long-term income
3% Cash alternatives
Mid-cap equity 8%
REIT equity 3%
High-yield fixed income 4%
International fixed income* 7%
39%
Traditional
fixed income
REIT equity 3%
Commodities 2%
54%
Traditional
fixed income
74%
Traditional
fixed income
6% International equity
3% Cash alternatives
Small-cap equity 4%
Conservative income
Growth
Long term
24%
Traditional
fixed income
30%
Large-cap
equity
Cash alternatives 2%
Commodities 3%
Small-cap equity 14%
Commodities 3%
Small-cap equity 16%
Conservative growth
2% REIT equity
32%
International
equity
30%
Large-cap
equity
Moderate growth
3% REIT equity
28%
Large-cap
equity
17%
Mid-cap
equity
Long-term growth
Investment objectives
Risk tolerance
Growth and income. Balance in emphasis between potential capital appreciation and income.
Moderate. A higher degree of risk for the potential to receive higher returns.
13
Definitions
Commodities are basic goods used in commerce that are generally
interchangeable with other commodities of the same type. Commodities
are most often used as inputs in the production of other goods or services.
Consumer Price Index (CPI) is a measure of the weighted average of
prices of a basket of consumer goods and services, such as transportation,
food, and medical care. The CPI is calculated by taking price changes for
each item in the predetermined basket of goods and averaging them; the
goods are weighted according to their importance. Changes in CPI are
used to assess price changes associated with the cost of living.
Core is a broad, well diversified position in commodities or international
investments.
Current yield (frequently referred to as yield) is the annual income an
investment provides divided by its current market price. For example, a
bond selling at par ($1,000) paying $100 annually in interest would have
a 10% yield. However, if the bonds market price fell to $900, its yield
would increase to approximately 11%.
Cyclical stocks are typically those of companies that sell discretionary
items that consumers can afford to buy more of in a booming economy
and will cut back on during a recession. In other words, when the economy
is doing well, cyclical investments tend to perform well. The opposite, of
course, is true when the economy is doing poorly. Defensive investments,
on the other hand, tend to be less affected by economic cycle changes.
Defensive stocks tend to be resistant to general stock market fluctuations.
An investor may hold these stocks to help provide their stock portfolio
with some price stability in a volatile market. Utility, gold and silver
producer, and some consumer goods stocks are generally considered
defensive. Cyclical stocks, on the other hand, tend to be more sensitive
to general stock market fluctuations.
Duration can be used to estimate the percentage change in a bonds value
that will result from a 1% change in interest rates. For example, a duration
of four means that a 1% change in prevailing rates in a one-year period
should shift the bonds price in the opposite direction by 4%. The longer
(higher) the duration, the more the bonds price will fluctuate as interest
rates rise and fall.
Emerging markets are financial markets in countries with developing
economies. These markets are typically immature compared to those
of the worlds major financial centers but are becoming increasingly
sophisticated and integrated into international markets; they provide
potentially higher returns but are intensely volatile.
Gross domestic product (GDP) is the total value of the goods and
services the economy produces during a year. Increasing GDP indicates
growing economic activity. Decreasing GDP suggests the opposite.
High yield is noninvestment-grade fixed income securities (rated Ba1 or
lower by Moodys and/or BB+ or lower by S&P). These investments are
considered to be speculative and are subject to a higher degree of risk.
14
Index definitions
An index is unmanaged and not available for direct investment.
DBIQ Optimum Yield Diversified Commodity Index is a measurement of
14 commodities drawn from the energy, precious metals, industrial metals,
and agriculture sectors.
J.P. Morgan Emerging Markets Bond Index Global tracks total returns
for U.S.-dollar-denominated debt instruments issued by emerging-market
sovereign and quasi-sovereign entities.
MSCI EAFE (Europe, Australasia, and Far East) Index is a free floatadjusted market capitalization index that is designed to measure the
equity market performance of developed markets, excluding the U.S. and
Canada. The index consists of the following 21 developed-market country
indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany,
Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the
United Kingdom.
Disclaimers
Some information contained in this report was prepared by or obtained
from sources that Wells Fargo Advisors believes to be reliable. Any market
prices are only indications of market values and are subject to change.
Wells Fargo Advisors may not offer direct investments into the products
mentioned in this report.
15
Stay informed
Our strategists will be following all the latest developments in the news to determine the
potential impact on the U.S. and global economy, the markets, and political events overseas.
There are a number of ways to access our advice and commentary to stay informed about
how developments may affect you financially.
Go to wellsfargoadvisors.com/research
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a desired after-tax return on your investment. The information provided is based on internal and external sources that are considered
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be directed to your tax advisor.
Wells Fargo Advisors is a broker/dealer affiliate of Wells Fargo & Company; other broker/dealer affiliates of Wells Fargo & Company may
have differing opinions than those expressed in this report. Contact your Financial Advisor if you would like copies of additional reports.
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