WFII advises 'defensive position' for investors in current market

The Wells Fargo Investment Institute (WFII) has released its “2023 Midyear Outlook: Navigating End-of-Cycle Turbulence.” The report discusses WFII’s guidance to remain defensive in portfolio positioning, as the current economic slowdown is likely to evolve into a moderate recession during the second half of 2023 and into 2024, followed by a gradual, U.S.-led global recovery as 2024 progresses.

WFII suggests that investors should have a chance to position for an eventual 2024 recovery, but they might have to do so while the economy is still within the grips of the anticipated recession. For now, the important objective for investors is to understand how recessions evolve and to position defensively.

“Protecting capital during more challenging times is often as important — or more important — than growing capital,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management. “There will come a time to turn more opportunistic in positioning portfolios for a recovery; however, we need to respect the signals and understand when the risk and reward dynamic changes.”

For the remainder of the year, WFII anticipates periods of elevated volatility, especially as financial conditions tighten in the second half of the year. Drivers of this elevated volatility include potential inconsistencies between actual economic and policy trends versus the market’s perceptions of those trends. For example, the Fed’s stated policy is to keep rates high while high inflation persists, but markets expect rate cuts. Further, actual earnings have contracted for two consecutive quarters, but markets expect earnings to grow. While the markets realign with these trends, there is potential for these disjoins to create financial-market volatility.

WFII believes that earnings will contract further in 2023, and that an economic recession will stall 2023 corporate revenue growth. Profits should rebound through 2024, as the economic recovery gradually takes hold, but corporate earnings may not recapture their 2022 peak until early 2025.

Other highlights of WFII’s forecast include:

• The anticipated U.S. GDP (gross domestic product) growth target for 2023 year-end is 1.1 percent and 1.5 percent for 2024.
• Inflation will likely fall below 3 percent in 2023 and through 2024. The target for inflation in 2023 is 2.9 percent and 2.8 percent in 2024.
• The S&P 500 Index is expected to be relatively flat into year-end with stock prices rebounding in 2024. The index target range is 4,000 to 4,200 for year-end 2023 and 4,600 to 4,800 for 2024.
• One more interest rate increase is anticipated in 2023, before cuts start in 2024. The Federal Funds Rate forecast for 2023 is 5.25 percent to 5.5 percent and 3.75 percent to 4 percent in 2024.