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2012 Midyear Economic And Market Outlook
 

2012 Midyear Economic And Market Outlook

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Uncertainty overshadows an improving economy. The economy continues to recover from the worse downturn since the Great Depression, which caused the S&P 500 to lose more than 1/2 of its value ...

Uncertainty overshadows an improving economy. The economy continues to recover from the worse downturn since the Great Depression, which caused the S&P 500 to lose more than 1/2 of its value between October 2007 and March 2009. Although things are better now, this recovery has taken longer than many of us would have liked. As a result, I think we\’re still at least a little nervous about the future and uncertain about how to prepare our portfolios to face what may be down the road. In this presentation, I discuss what we at Wells Fargo Advisors see ahead for the economy, the domestic and international equity markets, fixed income investments, and commodities.

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    2012 Midyear Economic And Market Outlook 2012 Midyear Economic And Market Outlook Presentation Transcript

    • Uncertainty overshadowsimproving economyJason FuchsFinancial AdvisorWells Fargo AdvisorsJuly 2012Please see slides 28 and 29 for importantdisclaimers.
    • Investment Strategy Committee Economy U.S. equities Fixed income InternationalGary Thayer Stuart Freeman, CFA Brian Rehling, CFA Paul Christopher,CFAChief Macro Strategist Chief Equity Strategist Chief Fixed Income Chief International Strategist Strategist
    • What does all the uncertaintymean for the economy?
    • You have questionsHow is the recovery going? Sluggish recovery should continue.What’s ahead for GDP We expect modest growthand inflation? and benign inflation.What challenges may Europe, presidentialbe ahead? election and debt ceiling debate may feed volatility. 4
    • Economic outlookThe recovery remains subpar (%)Past performance is no guarantee of future results.
    • Economic outlookA debt-ceiling battle looms (%)Past performance is no guarantee of future results.
    • Amid the volatility, wheredoes the stock market go fromhere?
    • You have questionsWhere is the stock We believe the S&P 500market heading? will end the year higher than it is today.Will small-cap stocks We favor large-cap stocksperform better than versus small cap.large cap?What sectors look the Cyclically sensitive stocksmost attractive? should perform well in the coming months. 8
    • U.S. equities outlookS&P 500 should end the year higher Market’s performance has been “choppy.” Sideways movement is not unusual. We raised our year-end S&P 500 target range. 9
    • U.S. equities outlookSmall caps should underperform (%)Past performance is no guarantee of future results.
    • U.S. equities outlookCyclically sensitive stocks should outperformdefensiveEquity sectors – recommended portfolio weightingsAs of June 8, 2012 % of % of % of Overweight S&P 500 Guidance Evenweight S&P 500 Guidance Underweight S&P 500 Guidance Consumer 11.2% 13.3% Consumer 11.4% 11.0% Energy 10.7% 10.2% Discret. Staples Financials 14.2% 12.7% Info. Tech. 19.9% 23.5% Industrials 10.4% 10.5% H 11.8% 9.8% Materials 3.4% 5.0% Telecom. 3.2% 4.0%Note: Weightings may not add to 100% due to rounding. Source: Bloomberg, Wells Fargo Advisors Utilities 3.8% 0.0%
    • Are higher interest ratesaround the corner?
    • You have questionsWill interest rates We believe interest ratesincrease? will remain historically low in the coming months.What will the Federal With Operation TwistReserve do? extended – the Fed stands ready to do more if needed.Where are the We recommend credit-opportunities in fixed sensitive sectors for longer-income? term investors. 13
    • Fixed income outlook Interest rates should remain low Yield Source: Bloomberg, Wells Fargo AdvisorsPast performance is no guarantee of future results.
    • Fixed income outlookWhat will the Federal Reserve do?•Since the recession, the Fed has instituted: • Two rounds of quantitative easing • Operation Twist•Operation Twist extended through year-end – should helpkeep longer rates contained.•We don’t see need for further quanitative easing at this point.•Situation may change.•May see QE3 announced if the economic situation deteriorates.
    • Fixed income outlookRecommended portfolio weightingsAs of May 10, 2012, unless otherwise notedFixed income Slight Slight Overweight overweight Evenweight underweight Underweight Duration Corporate bonds Muncipal bonds Agency securities Treasury International Slightly short* Inflation- developed- Protected market debt Securities Emerging-market debt Preferred High-yield U.S. Treasuries securities securities Mortgage-backed sec urit ies *We recommend a duration slightly short of an investor’s target duration. If an investor does not have a target duration, then we recommend a duration of approximately 4.25 years in taxable portfolios, and 6.75 years for tax-exempt portfolios. Duration, stated in years, can be used to estimate the percentage change in a bond’s value that results from a 1% change in interest rates. The longer (higher) the duration, the more prices will fluctuate as interest rates rise and fall.
    • What lies ahead forinternational investments?
    • You have questionsWhat will happen in Europe should avoid theEurope? worst-case scenario.Is the global economic Slowdown should end inslowdown coming to the coming months.an end?Are there opportunities in Although cautious, we seeinternational investments? good prospects in international investments. 18
    • International outlookEurope is key•European crisis remains principal risk to globalconfidence.•We believe euro-zone leaders will work to addressthe: • Union’s immediate financial problems • Need for long-term economic growth•China’s economy is growing but slower than expected.•Iran continues to create tension, but we don’tanticipate war.
    • International outlookGlobal slowdown may be ending12-month growth rates 3/12 OECD leading indicators* OECD industrial production* Source: Bloomberg, Wells Fargo Advisors * Data are the composite totals for the countries in the Organization for Economic Cooperation and Development (OECD)
    • International outlookOpportunities in international investments Equities Sovereign debt Currencies Commodities Japan1 Canada1 Japan1 Energy Indonesia2 Australia1 Emerging Asia basket2 Gold Malaysia2 New Zealand1 Mexico2 Norway 1 Developed international markets Source: Wells Fargo Advisors 2 Emerging international markets
    • What does it all mean?
    • Economic and market review Forecasts Year-end 2012 The slow economic recovery should 2.5% continue. Real GDP Inflation should remain in check. 2.5% CPI inflation Unemployment is likely to 8.0% remain high. Unemployment The stock market should go up – but 1,400-1,450 at a moderate rate. S&P 500 Interest rates should remain low. 2.50% 10-year Treasury yield
    • What should you do?
    • The Envision process ®Working toward your goals 73 74 75 76 77 78 The Envision process uses Monte Carlo simulations, which are based on historical and hypothetical information; there is no guarantee that investments will perform in accordance with the simulated trials.The Target Zone may help you evaluate your Recommended Plan. It does not represent a projection offuture portfolio values. The Target Zone graph is shown in actual dollars, the Envision technology usesMonte Carlo simulations, which are based on historical and hypothetical information; there is no guaranteethat actual future investments will perform in accordance with the simulated trials.
    • Important disclaimersIMPORTANT: The projections or other information generated by the Envision process technology regarding thelikelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results andare not guarantees of future results. Results may vary with each use and over time.Envision methodology:Based on accepted statistical methods, the Envision tool uses a simulation model to test your Ideal, Acceptableand Recommended Investment Plans. The simulation model uses assumptions about inflation, financial marketreturns and the relationships among these variables. These assumptions were derived from analysis of historicaldata. Using Monte Carlo simulation the Envision tool simulates 1,000 different potential outcomes over a lifetimeof investing varying historical risk, return, and correlation amongst the assets. Some of these scenarios willassume strong financial market returns, similar to the best periods of history for investors. Other will be similar tothe worst periods in investing history. Most scenarios will fall somewhere in between. Envision ® is a registeredservice mark of Wells Fargo & Company and used under license. Elements of the Envision presentations andsimulation results are under license from Wealthcare Capital Management, Inc. & Wealthcare Capital ManagementIP, LLC © 2002-2012 Wealthcare Capital Management, Inc. & Wealthcare Capital Management IP, LLC - U.S.Patents 7,562,040, 7,650,303, 7,765,138 and 7,991,675 - Other international patents approved and pending. AllRights Reserved. Wealthcare Capital Management, Inc. & Wealthcare Capital Management IP, LLC are separateentities and are not directly affiliated with Wells Fargo Advisors.
    • How can I help?
    • Important disclaimers Past performance is not an indication of future results. An index is not managed and is unavailable for direct investment. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuations, political and economic instability, and different accounting standards. This may result in greater share price volatility. The prices of small- and mid-cap company stocks are generally more volatile than large-company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal alternative minimum tax (AMT). Bond prices fluctuate inversely to changes in interest-rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
    • Important disclaimers While stocks generally have a greater potential return than government bonds and Treasury securities, they involve a higher degree of risk. Government bonds and Treasury bills, unlike stocks, are guaranteed as to payment of principal and interest by the U.S. government if held to maturity. 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 inversely to a change in interest rates. Buying commodities allows for a source of diversification for those sophisticated persons who wish to add commodities to their portfolios and who are prepared to assume the risks inherent in the commodities market. Any purchase represents a transaction in a non-income-producing commodity and is highly speculative. Therefore, commodities should not represent a significant portion of an individual’s portfolio. Buying gold, silver, platinum or palladium allows for a source of diversification for those sophisticated persons who wish to add precious metals to their portfolios and who are prepared to assume the risks inherent in the bullion market. Any bullion or coin purchase represents a transaction in a non-income- producing commodity and is highly speculative. Therefore, precious metals should not represent a significant portion of an individual’s portfolio. Wells Fargo Advisors may not offer direct investments into the products mentioned in this presentation. There is no assurance that any of the target prices mentioned will be attained. Any market prices are only indications of market values and are subject to change. Investments that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than investments that are more diversified. High-yield bonds, also known as junk bonds, are subject to greater risk of loss of principal and interest, including default risk, than higher-rated bonds. The prices of these bonds may be volatile , and they are generally only suitable for aggressive investors.
    • Securities and insurance Products: NOT INSURED BY FDIC OR ANY MAY LOSE NOT A DEPOSIT OF OR GUARANTEED FEDERAL GOVERNMENT AGENCY VALUE BY A BANK OR ANY BANK AFFILIATEWells Fargo Advisors is the trade name used by two separate, registered broker-dealers: Wells Fargo Advisors, LLC and WellsFargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. © 2012 Wells Fargo Advisors, LLC. All rights reserved. 0612-1427A [89172-v1] e7173