Midyear Outlook: Top portfolio ideas for the second half of 2024

A curvy bridge spanning a body of water

Here’s help for preparing for what may come in the months ahead and beyond.

At Wells Fargo Investment Institute, our predominant theme for 2024 has been to pay attention to pivots. The promise of artificial intelligence (AI), Federal Reserve rate cuts, and declining inflation and the continuation of strong earnings growth fueled a hard pivot to positive momentum to open the year. But slowing consumer spending and job growth should trigger a Federal Reserve policy switch to lower cost and greater availability of credit as the year progresses. In short, we look for an economic pivot from slowing to reaccelerating growth to calibrate the capital markets’ path forward.

Here’s a look at our top five portfolio ideas for the months ahead:

Use market pullbacks to broaden stock exposure

The November elections and any interruptions in inflation’s decline may prompt episodes of market volatility. We expect market drops to provide opportunities to add to U.S. Large Cap Equities.

Look for opportunities to extend bond duration and generate yield

We currently favor high-quality U.S. Short Term Taxable Fixed Income. But we also anticipate that the economy’s pivot could take longer-term yields into the 4.25% to 5.00% range, where investors may consider moving into longer maturities (duration) in an effort to lock in potentially attractive rates.

In other fixed income, we favor investment-grade Municipal Bonds, particularly general obligation and essential-service revenue issues. For investors in higher tax brackets, municipal bonds may provide an opportunity to incorporate tax efficiency into a portfolio. Investors may also consider our favorable rating on Securitized securities, such as residential mortgage-backed securities, as a way to add to portfolio yield potential.

Look to building blocks of growth for today and tomorrow

We believe investors can benefit from holding increased allocations to the S&P 500 Index Energy and Industrials sectors along with a broad exposure to Commodities. We think construction to support AI’s data-center and electrical requirements will benefit select real estate investment trusts (REITs) as well as energy and industrial companies. And all of this construction will require commodities.

Offset economic uncertainty with alternative investments

For qualified investors, we believe Relative Value strategies should continue to benefit from their defensive characteristics if credit dispersion increases in a cooling economy as we expect. Event Driven securities can provide a hedge during market volatility, while we anticipate Macro strategies should profit from stable trends in commodities and currencies. Looking ahead, there may be compelling opportunities for private capital, and we favor Growth Equity strategies.

Hedge geopolitical risks with a focus on quality

Recent escalations in global tensions encourage overseas demand for high-quality U.S. stocks and investment-grade bonds. Our preference for the Industrials stock sector includes the Aerospace & Defense sub-sector and electrical equipment and industrial machinery. We also favor Commodities (including Precious Metals).

For more on these portfolio ideas, download Wells Fargo Investment Institute’s “2024 Midyear Outlook: Approaching the Economy’s Pivot Point” report.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

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.

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.

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.

Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to 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.

Mortgage-related and asset-backed securities are subject to prepayment risks. Changes in prepayments may significantly affect yield, average life, and expected maturity.

The commodities markets 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.

Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Alternative investments, such as hedge funds, funds of hedge funds, managed futures, private capital, real assets, and real estate funds, are not appropriate for all investors. They are speculative, highly illiquid, and are designed for long-term investment, and not as trading vehicle. These funds carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. The high expenses associated with alternative investments must be offset by trading profits and other income which may not be realized. Unlike mutual funds, alternative investments are not subject to some of the regulations designed to protect investors and are not required to provide the same level of disclosure as would be received from a mutual fund. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the fund and the investor. An investment in these funds involve the risks inherent in an investment in securities and can include losses associated with speculative investment practices, including hedging and leveraging through derivatives, such as futures, options, swaps, short selling, investments in non-U.S. securities, “junk” bonds and illiquid investments. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Other risks can include those associated with potential lack of diversification, restrictions on transferring interests, no available secondary market, complex tax structures, delays in tax reporting, valuation of securities and pricing. An investment in a fund of funds carries additional risks including asset-based fees and expenses at the fund level and indirect fees, expenses, and asset-based compensation of investment funds in which these funds invest. An investor should review the private placement memorandum, subscription agreement and other related offering materials for complete information regarding terms, including all applicable fees, as well as the specific risks associated with a fund before investing.