Institute Alert

• This morning, President Trump suggested a new, 50% tariff on U.S. imports from the European Union (EU), to begin possibly as early as June. The president added the threat of a 25% levy on Apple iPhones not manufactured in the U.S.
• The market reaction focused on the risk of slower U.S. and EU economic growth: European equities and S&P 500 Index futures (nearby contract) were sharply lower on the news, as was the 10-year Treasury yield and crude oil futures.

• During the past six weeks, the pause on reciprocal tariffs has supported an equity rally, while U.S. economic data has shown some capacity to resist a recession, notably in sectors – such as services – that should resist direct tariff impacts.
• Today’s announced threat may be a goad to European leaders to negotiate more quickly with the U.S. In any case, the news reiterates our cautious guidance of recent weeks, namely, that new tariffs (and, as today, threats of tariffs) remain material risks to financial markets, especially when the announcements come as surprises.
• The S&P 500 Index (nearby futures contract) has shifted to a downtrend in the last week and may find support next at the 200-day moving average (5799), followed by the 50-day moving average (5603) and resistance at the recent highs (5982, 6163).

• The uncertainty is likely to promote range trading, and we favor neither chasing rallies nor selling on weakness. Instead, long-term we favor adding exposure incrementally on down days to high-quality U.S. equity asset classes and sectors and staying selective in fixed income (see below).
• If the bounce higher in risk assets resumes, investors may want to consider trimming lower quality areas like U.S. small-caps or emerging-market equities.

For investors who have cash and are considering investment, even amid uncertainty, we would suggest to stick with quality. Our favorable rating on Commodities may help hedge against potential inflation effects.

Our equity guidance prioritizes quality, while our fixed-income guidance emphasizes selectivity. International economies depend more on trade than does the U.S. economy, so we favor U.S. equities. Among the U.S. markets, we favor U.S. Large Cap and Mid Cap Equities and select sectors (Information Technology, Communication Services, Financials, and Energy). We also favor investment-grade fixed income and would focus on corporate bonds and essential-service and general obligation municipal securities. In our view, the intermediate maturity range (3 to 7 years) offers value at this time.

For investors who have a long-term focus and want to remain cautious here, some buffer can make sense. Money market rates are higher than they were the last time major uncertainty landed on financial markets in 2020. So, for now, we believe rates above 3% may be considered. If prices settle as we expect, legging back into financial markets, especially if underweight to strategic targets, remains a priority.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. 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. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. 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. 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. 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. Money market securities are short term, highly liquid instruments, with low risk. Some of the common instruments include Treasury bills, certificates of deposit and commercial paper.

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. This can result in greater price volatility. Communication Services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the Communication Services sector may also be affected by rapid technology changes, pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. 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 an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

An index is unmanaged and not available for direct investment.

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 Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information 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. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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