Chart of the Week

The above chart illustrates a clear dichotomy in global economic growth in recent months. A broad measure of economic activity in the U.S., as well as China and Japan, held firmly in expansionary territory in June, largely supported by AI-related investment. Meanwhile, activity in the eurozone lagged, weighed down by a relatively small technology sector and more limited exposure to the AI capital expenditure boom.

Looking ahead, some economic performance convergence may occur later this year, once supply chains begin to normalize following what we anticipate will eventually be a renegotiated U.S.-Iran ceasefire. This should benefit trade-sensitive Europe most, but the AI-related gap in performance still is likely to remain wide by historical standards, propelling the U.S. and certain economies in northern Asia, including South Korea and Taiwan.

We favor U.S. over international assets, while using market pullbacks as potential buying opportunities to bring international portfolio allocations up to neutral, especially in areas tied to the AI boom. Within the U.S., we favor Large Cap Equities, especially Financials, Information Technology, Materials, and Utilities. In fixed income, we prefer short-term securities (1-3 year-maturities), and we also favor Commodities which can serve as a potential inflation hedge.

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. 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. 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. 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.

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.

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