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Sources: Wells Fargo Investment Institute, Bloomberg, as of February 12, 2021. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

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Entering last year’s bear market, our guidance was cautious, focusing investors on high-quality sectors (strong cash positions, lower debt levels). Since the market low last March, we’ve made five sets of guidance changes to help investors position portfolios for potential early-cycle opportunities:

• April to September 2020 (1-3) — We upgraded High Yield Taxable Fixed Income to neutral on April 9, then to favorable on August 7. Also on August 7, we upgraded Materials to neutral and downgraded Financials to neutral. On September 14, seeing improved economic conditions, we upgraded U.S. Small Cap Equities to neutral and downgraded U.S. Taxable Investment Grade Fixed Income to unfavorable.
• November 19, 2020 (4) — We upgraded Emerging Market Equities to neutral, Materials to favorable, and Industrials to neutral, while downgrading Information Technology to favorable. In fixed income, anticipating rising long-term rates, we downgraded U.S. Short-Term Taxable Fixed Income to most unfavorable and U.S. Long-Term Taxable Fixed Income to unfavorable.
• January 19, 2021 (5) — As we revised our U.S. economic growth forecast higher, we again upgraded U.S. Small Caps and Emerging Markets — this time to favorable —and downgraded U.S. Mid Caps to neutral and Developed Market (ex-U.S.) to most unfavorable. We upgraded Industrials and Financials to favorable, Energy to neutral, and Consumer Staples and Utilities to unfavorable.

We expect the Federal Reserve’s accommodative stance to last through 2021, which should support risk assets, especially equities. In addition, we believe single-party government is likely to boost fiscal spending, a key ingredient for reflation. Cyclical sectors and markets have tended to perform well early in a bull market, and we have seen this play out so far in 2021 in U.S. Small Cap Equities, Emerging Market Equities, and the Materials and Industrial sectors — all of which we upgraded in 2020.

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.

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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