Weekly Roundup Financial Report

WEEKLY GUIDANCE FROM OUR INVESTMENT STRATEGY COMMITTEE
October 1, 2018
How You Can Invest When Markets Are at All-Time

Tracie McMillion, CFA Highs
Head of Global Asset Allocation
Strategy
Key takeaways
» U.S. equity markets hit all-time highs last week. U.S. stock markets have outpaced all
other major asset classes year to date.
» As the U.S. equity bull market now is the longest on record, investors may be
wondering if they should maintain substantial exposure to U.S. equities.
What it may mean for investors
» We expect U.S. equity markets to continue rising on positive fundamentals—and
suggest that most investors allocate a sizable portion of their equity assets to U.S.
equity markets.
» We also favor remaining well-diversified and considering opportunities outside of the
U.S. in both equity and fixed-income markets. Because downturns are often
unexpected, we suggest holding a broad range of asset classes, including equities,
high-quality bonds, real assets, and hedge funds for qualified investors, consistent
with an investor’s risk tolerance.
U.S. equity markets hit all-time highs in recent days, topping levels first reached in
January of this year. With markets at such heights, investors may be wondering if they
should continue to hold large portions of U.S. equity assets in their portfolios.
Asset Group Overviews Meanwhile, many are wary of investing outside of the U.S. as those markets, by and
Equities ............................ 4 large, have suffered losses so far this year. Our outlook is for U.S. equity markets to
continue to climb higher over the next 12 months, while international equity markets
Fixed Income ................ 5
may offer even more attractive returns. Fixed income could continue to languish as we
Real Assets ..................... 6 expect the Federal Reserve (Fed) to raise interest rates further—and international
Alternative central banks could soon join the Fed in tightening money supply. We see the most
Investments ................... 7 opportunity for fixed income in shorter term, higher-quality issues, and in emerging
market debt. We expect hedge funds to post solid, single-digit returns overall, while
helping to offset market risks.
© 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 9

Highs
Despite a largely positive start to the year, asset class returns have varied widely so far
in 2018. U.S. equity returns and international equity returns diverged in April, and the
differential has continued to widen. U.S. tax reform and fiscal spending have led to
positive earnings surprises outweighing negative trade-related news and the
uncertainty of midyear elections. Trade concerns have manifested themselves in a
stronger U.S. dollar and weak sentiment related to international markets. Both of these
factors have weighed on international returns this year, while earnings have continued
to grow in those markets. That means valuations are relatively more attractive in
international equity markets, particularly in emerging markets.
Bond prices typically fall when interest rates are rising, and that generally has been the
case so far this year as most high-quality U.S. bond returns have been negative. And,
after years of near-zero returns, cash-alternative yields finally have risen to offer more
meaningfully positive returns over the course of the year. Oil has seen very strong price
returns, while the overall commodity index has declined. 1
Chart 1. U.S. equities have outpaced other major asset classes year to date
U.S. Small Cap Equity 11.1
U.S Large Cap Equity 10.2
U.S. Mid Cap Equity 7.1
MG&I 3AG Portfolio 2.6
U.S. High Yield Fixed Income 2.4
Public Real Estate 0.2
Developed ex - U.S. Equity 0.2
U.S. Municipal Fixed Income -0.6
U.S. Taxable Inv Grade Fixed Income -1.7
U.S. Treasury Fixed Income -1.7
Developed ex - U.S. Fixed Income -2.2
Commodities -2.6
Emerging Market Fixed Income -3.9
Emerging Market Equity -7.6
Frontier Market Equity -11.3
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

Percent
Sources: Wells Fargo Investment Institute, Morningstar Direct, as of September 26, 2018. For illustrative purposes only. Index returns do not represent
investment returns or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other
distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for
direct investment. Hypothetical and past performance is no guarantee of future results. Composition of the Moderate Growth and Income
Three Asset Group Portfolio, descriptions of the risks associated with the asset classes, and definitions of the indices are provided at the end of this
report.
1
Bloomberg Commodity Index.
Highs
Pick your allocations wisely
At the portfolio level, higher exposure to U.S. equities within the overall equity
allocation (relative to global equity indices) has benefited so far in 2018. Indeed,
incorporating U.S. equities into Wells Fargo Investment Institute’s Income model
allocations has lifted returns for these portfolios relative to a high-quality U.S. bond
index. 2 As a result, in a year when interest rates have been rising at the fastest pace in
10 years and many bonds have lost market value, diversified Income portfolios may
post positive gains this year. Growth and Income portfolios also have benefited from
holding larger weightings of U.S. equities than the global equity indices; nevertheless,
their year-to-date returns likely are lagging a U.S.-only portfolio. Growth portfolios are
also positive for the year, benefiting from their large allocations to U.S. stocks, although
international equities have proven to be a counterweight to their performance so far in
2018.
Going forward, we believe that U.S. equity markets will continue to rise on positive
fundamentals—and investors should continue to hold a sizable portion of their assets in
U.S. markets. However, given the strong run in U.S. equity markets over the past few
years, we believe it is very important to consider the attractive opportunities that lie
outside of the U.S. Furthermore, because market downturns are often unexpected, we
suggest holding asset classes that tend to do well when equity markets correct, such as
high-quality bonds and hedge funds for qualified investors, consistent with an
investor’s risk tolerance.
Most importantly, investors should stick to a well-designed investment plan. Returns
for the assets in a portfolio will vary from year to year, and those that support a
portfolio one year may weaken it the next. It is impossible to know for certain which
assets will rise and which will fall in a given year. Yet we believe a well-diversified
portfolio matched to an investor’s level of risk tolerance should allow for participation
in positive markets and offer a measure of downside protection when equity markets
decline. Keep in mind, diversification strategies do not guarantee investment returns or
eliminate risk of loss.
2
Bloomberg Barclays U.S. Aggregate Bond Index.
EQUITIES
Scott Wren
Senior Global Equity Strategist
Adjusting our equity sector guidance in tandem with S&P’s GICS restructuring
After the equity-market close on September 28, Standard & Poor’s restructured its 11-
Favorable sector Global Industry Classification Standard (GICS) lineup as announced late last
U.S. Large Cap Equities year. Importantly, the Telecommunications Services sector was eliminated and
replaced by the new Communication Services sector. This new sector contains
companies from the old Telecommunications Services sector, along with several social
media and entertainment software companies that were moved from the Information
Technology (IT) sector. The new sector also absorbed companies in the advertising,
broadcasting, cable and satellite TV, and movie and publishing industries from the
Favorable Consumer Discretionary sector. The constituents of the remaining eight sectors have
U.S. Mid Cap Equities not changed.
We have taken this change as an opportunity to update our tactical guidance for a
number of S&P 500 Index sectors (see table below). We have initiated guidance on the
new Communication Services sector with an unfavorable rating. As for the other two
sectors involved in the GICS restructuring, we continue to rate the Consumer
Neutral Discretionary sector as favorable and the IT sector as neutral.
U.S. Small Cap Equities
We also have updated guidance on four additional sectors. We have upgraded both the
Financials and Industrials sectors to most favorable from favorable. We have raised our
rating on Consumer Staples from most unfavorable to neutral. Finally, we have
downgraded our rating on the equity Real Estate sector from neutral to unfavorable.
Additional commentary on these sector guidance changes and the new Communication
Neutral Services sector is available in the Institute Alert report published on September 28.
Developed Market
Ex-U.S. Equities Key takeaways
» We have changed our tactical guidance on several S&P 500 Index sectors in tandem
with S&P’s GICS sector restructuring.
» We continue to have a favorable view of U.S. large-cap equities.
Wells Fargo Investment Institute Tactical Equity Sector guidance changes
Favorable
Emerging Market Equities
Sectors New guidance Previous guidance
Communication Services Unfavorable ---
Consumer Staples Neutral Most unfavorable
Financials Most favorable Favorable
Industrials Most favorable Favorable
Real Estate Unfavorable Neutral
Source: Wells Fargo Investment Institute, September 28, 2018.

FIXED INCOME
Brian Rehling, CFA

Co-Head Global Fixed Income Strategy
A shrinking Fed balance sheet

The Fed announced another increase in its monthly balance-sheet runoff at last week’s
Unfavorable Federal Open Market Committee (FOMC) meeting. The Fed’s announcement of an
U.S. Taxable Investment Grade increase in the size of its monthly balance-sheet runoff continued exactly according to
Fixed Income the plan the Fed previously disseminated. As market participants likely had
incorporated this plan into expectations, we do not anticipate a material interest-rate
impact as balance-sheet runoff continues to grow. We do view the Fed’s balance-sheet
runoff as an important secondary factor, which would relieve one of the pressures that
Favorable has kept longer-term interest rates depressed.
U.S. Short-Term Taxable Fixed
Beginning in October, the new monthly roll-off target is $30 billion in Treasury
Income
securities and $20 billion in mortgage-backed securities—up from $24 billion and $16
billion, respectively. The Fed’s balance sheet, comprised primarily of Treasury and
mortgage-backed securities, stood near $800 billion before the initiation of quantitative
easing in 2008. After the Fed announced three separate rounds of asset purchases, the
Neutral
U.S. Intermediate Term Taxable Fed’s balance sheet ballooned to $4.5 trillion.
Fixed Income We anticipate that the Fed will maintain a much larger normalized balance sheet going
forward than it did before the financial crisis. We will watch for the Fed to provide
further insight on what its future balance-sheet reduction plans are. How the Fed
chooses to address this issue will signal how the Fed expects to implement monetary
Most Unfavorable policy going forward. Continuing the current approach would necessitate a
U.S. Long-Term Taxable Fixed significantly larger balance sheet than was needed pre-crisis. This could lead to an end
Income
for Fed balance-sheet reduction as soon as late 2019.
Key takeaways
» We do not expect continued Fed balance-sheet reduction to have a material near-
Unfavorable term impact on the bond market.
High Yield Taxable » The Fed intends for balance-sheet reduction to be a generally passive process and
Fixed Income not a primary tool for implementing monetary policy.
» We do not recommend that investors change their fixed-income strategy solely as a
result of upcoming Fed balance-sheet reduction operations.
Federal Reserve balance sheet
Unfavorable $5,000,000
Size of Fed balance sheet (millions of U.S. dollars)
Developed Market $4,500,000

Other
Ex.-U.S. Fixed Income $4,000,000

MBS
Treasury securities
$3,500,000
$3,000,000
$2,500,000
Favorable $2,000,000
Emerging Market $1,500,000
Fixed Income $1,000,000
$500,000
$0
May-06
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Source: Federal Reserve Bank of St. Louis (FRED), September 25, 2018. MBS = mortgage-backed securities.

REAL ASSETS
Austin Pickle, CFA “For every minute you are angry, you lose 60 seconds of happiness.”
Investment Strategy Analyst -- Ralph Waldo Emerson
OPEC+ fails to appease markets as Iran sanctions loom

Oil prices recently have jumped on expectations of reduced Iranian oil exports and lack
Favorable of commitment from OPEC+ (Organization of Petroleum Exporting Countries, plus
Commodities others such as Russia) to compensate for lost barrels. This was a one-two punch that
propelled the price of Brent oil nearly 5% from the September 21 intraday low (just
before the OPEC+ Algiers meeting) to the September 25 high.
On May 8, President Trump announced that the U.S. would withdraw from the Iran
agreement and that new U.S. oil sanctions would be established as of November 2018.
Initially, the market had estimated a moderate decline in Iranian crude exports
Neutral
stemming from the sanctions. But since the U.S. has declined to grant waivers and put
Private Real Estate
pressure on countries to comply, estimates for lost barrels have increased. The chart
shows that Iran’s crude-oil exports already have taken a hit as India and Europe, two of
Iran’s largest oil customers, have substantially curtailed imports in anticipation of the
November sanctions.
Relief in the form of increased oil supply had been expected to follow the Algiers
Neutral OPEC+ meeting, yet OPEC+ failed to deliver. This spooked the market and drove Brent
Public Real Estate oil price to its highest level since 2014. While these developments are concerning, we
believe that the majority of “bad news” already has been priced into oil markets. We
believe that oil prices will be volatile, but we expect them to end the year lower than
they are today as supply growth continues to outpace demand growth. Risks to our
outlook remain, however, and we will continue to monitor the situation closely.
Key takeaways
» Iranian oil exports have begun to decline as the November U.S. oil sanctions loom near.
» OPEC+ failed to appease markets, which had expected an announcement that
members would increase oil supply to compensate for lost Iranian barrels.
Iran crude-oil exports by country and region
3000
2500
Thousand barrels per day
2000
1500
1000
500
0
2015 2016 2017 2018
China India Europe Other
Sources: Bloomberg, Wells Fargo Investment Institute. Monthly data: July 31, 2015 – August 31, 2018.
ALTERNATIVE INVESTMENTS
Justin Lenarcic
Global Alternative Investment Strategist
Still a “one sided” stock pickers’ market

For several years, we have held the view that the environment for stock selection was
improving, driven primarily by the gradual removal of liquidity and eventual tightening
Neutral
Private Equity of monetary policy. The decrease in correlations among equities, and a greater level of
dispersion among industries, sectors, and geographies, has validated our thesis. Indeed
we are, and have been, in a stock pickers’ environment. The unfortunate truth, however,
is that the opportunity set for stock pickers still resides primarily on the “long” side and
remains elusive on the “short” side.
Neutral The first chart highlights the difference between the Goldman Sachs VIP Long Index
Hedge Funds-Macro
and the S&P 500 Total Return Index. The divergence in the lines, which began in 2013
and accelerated last year, reflects how significantly an index of some of the most widely
held hedge fund equity positions has outperformed the passively-managed S&P 500
benchmark, despite the historical bull market. Unfortunately, the inverse is true for the
Neutral short side—as the Goldman Sachs VIP Short Index has only marginally outperformed
Hedge Funds-Event Driven the inverse return of the S&P 500 Total Return Index.
The spread between shorting the equity market and shorting specific stocks has always
been tight, except during periods of market stress or recession. Furthermore, short
alpha is definitely “manager-specific.” We expect to see better performance from short
portfolios going forward as the cycle matures, but in the meantime, this stock pickers’
Favorable
market remains more conducive to long positions.
Hedge Funds-Relative Value
Key takeaways
» We expect Long/Short Equity hedge funds to continue benefiting from this stock
pickers’ environment—but primarily on the long side rather than for short positions.
» Shorting equities remains challenging. Yet, we anticipate that the opportunity set
Most Favorable will improve as both the economic and credit cycles mature.
Hedge Funds-Equity Hedge Stock picking for long positions has outperformed stock picking for shorts
600
Index value normalized to
500
400
300
200
100
100
0
Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17
Alternative investments, such as Goldman Sachs VIP Long Index S&P 500 Total Return Index
hedge funds, private equity, private 140
debt and private real estate funds 120
Index value normalized to
are not suitable for all investors and 100

are only open to “accredited” or 80
100
60
“qualified” investors within the
40
meaning of U.S. securities laws. 20
0
Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17
Goldman Sachs VIP Short Index
Sources: Bloomberg, Hedge Fund Research Inc., September 2018. Data indexed to 100 as of September 26, 2018. Past performance is not a guarantee of future
results. Short selling risks include the possibility of unlimited investment loss and the added costs to cover short positions. Goldman Sachs Hedge Fund VIP index
consists of hedge fund managers' “Very-Important-Positions,” or the U.S.-listed stocks whose performance is expected to influence the long portfolios of hedge
funds. Those stocks are defined as the positions that appear most frequently among the top 10 long equity holdings within the portfolios of fundamentally-driven
hedge fund managers. The S&P 500 Index is a market capitalization-weighted index generally considered representative of the U.S. stock market. An index is
unmanaged and not available for direct investment.
Risks Considerations
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. High yield (junk) bonds have lower credit ratings and are
subject to greater risk of default and greater principal risk. 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, private equity/private debt and private real estate funds, are speculative and involve a high
degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an
investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include
losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests
in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and
delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate
fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents
should be carefully reviewed prior to investing.
Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the
use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential
since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can
significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility
and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the
risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.
Definitions
An index is unmanaged and not available for direct investment.
Bloomberg Commodity Index Commodities (BCOM). Bloomberg Commodity Index is a broadly diversified index comprised of 22
exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market
liquidity.
Commodities (BCOM). Bloomberg Commodity Index is a broadly diversified index comprised of 22 exchange-traded futures on physical
commodities and represents 20 commodities weighted to account for economic significance and market liquidity.
Developed Market Ex-U.S. Equities (U.S. dollar)/(Local) . MSCI EAFE Index is a free float-adjusted market capitalization index that is
designed to measure the equity market performance of 21 developed markets, excluding the U.S. and Canada. Goldman Sachs VIP Short Index
Developed Market Ex-U.S. Fixed Income (Unhedged). J.P. Morgan GBI Global ex-US Index (Unhedged) in USD is an unmanaged index
market representative of the total return performance in U.S. dollars on an unhedged basis of major non-U.S. bond markets.
Emerging Market Equities (U.S. dollar)/(Local). MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is
designed to measure equity market performance of 23 emerging markets.
Emerging Market Fixed Income (U.S. dollar). J.P. Morgan Emerging Markets Bond Index (EMBI Global) currently covers more than 60
emerging market countries. Included in the EMBI Global are U.S.-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market
debt instruments issued by sovereign and quasi-sovereign entities.
Frontier Market Equities (U.S. dollar)/(Local). MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is
designed to measure equity market performance of 24 frontier (least developed) markets.
The Goldman Sachs Hedge Fund VIP Index consists of 50 companies that “matter most” to hedge funds. The positions in this index are the
stocks that appear most frequently as top ten holdings of hedge funds with between 10 and 200 total equity positions.
High Yield Taxable Fixed Income. Bloomberg Barclays US Corporate High-Yield Index covers the universe of fixed-rate, non-investment-
grade debt.
Moderate Growth & Income Portfolio composition is as follows: Bloomberg Barclays U.S. Treasury Bills (1-3M): 3%, Bloomberg Barclays U.S.
Aggregate (1-3Y): 4%, Bloomberg Barclays U.S. Aggregate (5-7Y): 16%, Bloomberg Barclays U.S. Aggregate (10+Y): 7%, JPM GBI Global Ex-US:
3%, Bloomberg Barclays U.S. Corporate High-Yield Bond: 6%, JPM EMBI Global Index: 5%, FTSE EPRA/NAREIT Developed: 5%, S&P 500: 21%,
Russell Midcap®: 9%, Russell 2000®: 8%, MSCI EAFE: 6%, MSCI Emerging Markets: 5%, Bloomberg Commodity: 2%
Public Real Estate. FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real-estate companies and REITs
in developed countries worldwide.
U.S. Investment Grade Corporate Fixed Income. Bloomberg Barclays U.S. Corporate Bond Index measures the investment grade, fixed-
rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial
issuers.
U.S. Large Cap Equities. S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The
index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
U.S. Mid Cap Equities. Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe.
U.S. Municipal Bond. Bloomberg Barclays U.S. Municipal Index is considered representative of the broad market for investment grade, tax-
exempt bonds with a maturity of at least one year.
U.S. Small Cap Equities. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which
represents approximately 8% of the total market capitalization of the Russell 3000 Index.
U.S. Treasury. Bloomberg Barclays US Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one
year or more.
General Disclosures
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 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.
Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is
not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based
financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in
their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC,
Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 0918-04828

WEEKLY PERSPECTIVE ON CURRENT MARKET SENTIMENT
Twenty Percent Down October 3, 2018
Scott Wren Key takeaways

Senior Global Equity Strategist
» The 10 year anniversary of the fall of Lehman Brothers brought back painful
memories of the financial crisis to many investors.
Last Week’s S&P 500 Index: » Too much leverage and not enough skin in the game almost always leads to a
-0.5% negative outcome.
The conversation has died down over the last few weeks, but for a number of days the financial news headlines
were swirling with stories surrounding the 10-year anniversary of Lehman Brothers filing for bankruptcy. That
fateful day occurred on September 15, 2008. Depending on how you look at it, the event changed the world—at
least for a good stretch of time. Many would argue we are still trying to work our way out of it. It’s hard to argue
with that line of reasoning when the Federal Reserve, after nearly three years and a total of eight rate hikes, still
has the fed funds target back up only to a 2.0% to 2.25% range after dropping rates to virtually 0% in December
2008. And global central banks? They have hardly even started to “normalize” rates since the depths of the
financial crisis.
But as the media coverage of the anniversary was rolled out, this strategist noticed that there was little attention
paid to something very simple that could have possibly prevented, or at least lessened, the impact of the crisis. It’s
something I have rolled around in my mind many times over the last 10 years, and I am not the only one to voice
this line of thinking.
Regular readers of this weekly piece know we like to look at complicated issues and break them down into their
simplest components. Oftentimes it’s a combination of the basics and a little common sense that gives the clearest
view of the situation. And of all the issues we have tackled over the years, this one appears to be one of the most
obvious. Yes, we can discuss the effects of mortgage derivatives and intertwined counterparty risks all we want,
but the bottom line on the last decade’s financial meltdown was that many homeowners, flippers, housing
investors, and others caught on the wrong side of the housing tsunami were lacking one critical element: skin in
the game.
Back in the mid-1980s when this strategist and his new spouse bought their first dwelling, the market (not the
government) demanded that home buyers come up with a 20% down payment. If this down payment was borrowed
from a parent or rich aunt or uncle, the lender needed to know the details. If it was a gift from anyone, paperwork
had to be signed that stated nothing had to be paid back. Of course, there was always mortgage insurance, which
was required for those putting down less than 20%. But that also made qualifying for the loan a lot tougher. It
would surprise many currently in their 20s and 30s to learn you had to come up with a lot of cash to buy your piece
of the American Dream.
But too much leverage and not enough skin in the game is always a bad (and sometimes lethal) combination.
Loans of 125% of equity. Zero down. Remember those? But home values never go down. Yeah, right. Have a
problem? Just walk away. The shocking thing is the government is still guaranteeing Federal Housing
Administration (FHA) loans that have as little as 3.5% down. I’m not kidding.
But a simple home-buying concept could have possibly spared the globe much of the pain from the financial crisis.
This strategist can sum it up in three words: twenty percent down.

General Disclosures
from, this report.

I NVES T M ENT T OPICS AND M ARKET T RENDS U SING C URRENT AND HIST ORICAL E CONOMIC D ATA
October 3, 2018
Convergence—The Future for Global Interest Rates

3.5% Federal funds target (mid-rate)
ECB deposit rate
3.0%
BOJ policy balance rate
BoE official bank rate
2.5%
USD - OIS-implied overnight rates
EONIA - implied ECB deposit rates
2.0%
JPY - OIS-implied overnight rates
1.5% GBP - OIS-implied overnight rates
1.0%
0.5%
-0.5%
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25
Sources: Bloomberg, Wells Fargo Investment Institute, September 26, 2018. ECB = European Central Bank. BOJ = Bank of Japan. BoE = Bank of England. EONIA = Euro OverNight Index Average.
GPB = British pound sterling. JPY=Japanese yen. USD=U.S. dollar. These forward-looking policy rates are derived from the Overnight Index Swaps (OIS) market and are subject to change. An
overnight index swap is an interest-rate swap involving the overnight rate being exchanged for a fixed interest rate.
Market expectations for central-bank policy rates through 2023

This chart shows market expectations for monetary policy rates across the U.S, eurozone, Japan, and U.K. over the
next five years. We broadly concur with this view. The chart illustrates that 2019 is likely to be a watershed year for
policy convergence and interest-rate differentials.
While the Federal Reserve is nearing the end of its rate-hike cycle, the ECB (European Central Bank) has announced
that it will end quantitative easing late this year and is likely to begin a series of gradual rate increases in late 2019.
That would narrow short-term rate differentials with the U.S. and cut the dollar’s relative yield advantage versus
developed markets overseas. We expect the Bank of Japan to remain very cautious but to continue preparing markets
for eventual monetary-policy normalization.
We believe that monetary-policy divergence between the U.S. and the eurozone and Japan will give way to
convergence in 2019. In other words, we believe monetary policy divergence will soon peak. We believe that recent
dollar strength has almost run its course, and we continue to expect that the dollar weakness seen in late 2017 and
early 2018 will resume—and will be more apparent in 2019.
Peter Wilson, Global Fixed Income Strategist This chart was adapted from the Investment Strategy report dated September 24, 2018.

General Disclosures
from, this report.

WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS
October 2, 2018
Potential Tariff Impacts on the Chinese Economy

Peter Donisanu Key takeaways
Investment Strategy Analyst » The United States’ decision to raise tariffs on Chinese goods has increased the risk
that China’s economy could feel the effects of a trade-related slowdown.
» We estimate that a trade-related slowdown could reduce Chinese economic growth in
the range of 0.4% to 0.8% annually in the near term.
» Still robust sentiment and U.S. economic growth, coupled with proactive Chinese
policy measures, should help mitigate a trade-related slowdown in China’s economy.
For now, we view these conditions as supportive of risk sentiment in financial markets.
Last month, the U.S. increased tariffs on an expanded pool of Chinese goods. This
means that an increasing number of U.S. firms could feel the pinch of higher cost of
goods in 2018—and even more so next year. Importers have several options when it
comes to dealing with rising costs. They could either: 1) absorb the higher costs to
preserve long-term market share at the expense of near-term profit margins, 2) pass
along some or all of the costs to consumers, or 3) source products from an alternative
U.S. or international source. If some firms were to choose the third option, what would it
mean for the Chinese economy?
Chart 1. China’s U.S. exports are a notable part of its manufacturing sector
China's manufacturing output
Chinese exports to the U.S.
China's total economic output
Sources: Wells Fargo Investment Institute, Bloomberg, September 27, 2018.

Economic impact on the Chinese economy
We believe that reduced demand for Chinese goods driven by rising tariffs potentially
could have a notable impact on the Chinese economy, given its exposure to
manufacturing. Manufacturing activity accounted for 30% of China’s economic output
in 2017. Of this amount, exports to the U.S. represented approximately 15% of
manufacturing activity. Put into context, trade with the U.S. as a share of the Chinese
economy in 2017 was larger than China’s information technology, business, and hotel
industries, separately.
Based on our “back-of-the-envelope” estimations, we believe that the short-term effect

on Chinese economic growth could be slowing of between 0.4% and 0.8% annually—
assuming that:
 U.S. demand for Chinese imports declines by between 10% and 20% due to
import substitution
 Chinese manufacturing output remains constant next year
 The decline in exports to the U.S. is not rerouted to China’s other trading
partners
 Beijing does not enact policies to support the Chinese economy in the midst of
trade uncertainties.
Market implications
Time will tell which of the three routes U.S. importers will take in response to the
higher, tariff-driven cost of Chinese goods—absorb the costs, pass the costs on to
buyers, or substitute other suppliers for Chinese ones. While our calculations estimate
a potential economic impact, it is more probable that policymakers in Beijing will step
up monetary and fiscal stimulus in an effort to get ahead of any trade-related
manufacturing and economic slowdown. Indeed, the People’s Bank of China recently
has eased borrowing conditions, while the government has stepped up its support of
infrastructure spending, partly in response to the trade dispute with the U.S. We believe
that these efforts should help to soften any trade-related impact on the Chinese
economy in the near term.
Chart 2. U.S. business and consumer confidence is at multi-year highs

160 65
140 60
120
55
100
50
80
45
60
40
40
20 35
0 30
Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18
Conference Board Consumer Confidence Index ISM Manufacturing Purchasing Managers' Index
Sources: Wells Fargo Investment Institute, Bloomberg, September 27, 2018.

Likewise, some of our preliminary work has shown that the direct impact of rising U.S.-
China tariffs is likely to be manageable for the U.S. economy. Yet, the indirect effects—
such as a sharp deterioration in household and business confidence as the trade dispute
intensifies—could have a broader and more meaningful impact on the U.S. economy
and markets, if the tariffs were to continue indefinitely.
Moreover, U.S. (and Chinese) local spending and sentiment remain robust, while fiscal
and monetary policy in China should help mitigate a trade-related slowdown in the
Chinese economy. We view these conditions as supportive of risk sentiment in
financial markets. The bad news about tariffs is that they reduce economic growth. The
good news is that—so far—they are arriving slowly and may not be in place long enough
to warrant immediate reallocation in portfolios.

Economic Calendar
Date Country Report Estimate Previous

10/2/2018 AUSTRALIA RBA Cash Rate Target 1.50% 1.50%
10/2/2018 EUROZONE PPI YoY 3.80% 4.00%
10/2/2018 JAPAN Nikkei Japan PMI Composite -- 52
10/3/2018 EUROZONE Markit Eurozone Composite PMI 54.2 54.2
10/3/2018 US MBA Mortgage Applications -- --
10/3/2018 US ADP Employment Change -- 163k
10/3/2018 US Markit US Services PMI -- --
10/3/2018 US Markit US Composite PMI -- --
10/3/2018 US ISM Non-Manufacturing Index -- 58.5
10/4/2018 INDIA Nikkei India PMI Services -- 51.5
10/4/2018 MEXICO Overnight Rate 7.75% 7.75%
10/4/2018 US Initial Jobless Claims -- --
10/4/2018 US Continuing Claims -- --
10/4/2018 US Durable Goods Orders -- --
10/4/2018 US Factory Orders -- -0.80%
10/4/2018 US Cap Goods Orders Nondef Ex Air -- --
10/4/2018 US Cap Goods Ship Nondef Ex Air -- --
10/5/2018 GERMANY Factory Orders MoM 0.50% -0.90%
10/5/2018 INDIA RBI Repurchase Rate 6.75% 6.50%
10/5/2018 US Change in Nonfarm Payrolls -- 201k
10/5/2018 US Unemployment Rate -- 3.90%
10/5/2018 US Trade Balance -- -$50.1b
10/5/2018 US Change in Manufact. Payrolls -- -3k
10/5/2018 US Average Hourly Earnings YoY -- 2.90%
10/5/2018 US Average Hourly Earnings MoM -- 0.40%
10/5/2018 US Change in Private Payrolls -- 204k
10/5/2018 US Consumer Credit -- $16.640b
10/7/2018 CH Caixin China PMI Services -- 51.5
10/8/2018 GE Industrial Production SA MoM -- -1.10%
10/8/2018 AU NAB Business Confidence -- 4
10/9/2018 MX CPI YoY -- 4.90%
10/9/2018 JN Core Machine Orders MoM -- 11.00%
10/9/2018 US NFIB Small Business Optimism -- 108.8
Source: Bloomberg, as of September 28, 2018.

Risk Considerations
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.
General Disclosures
from, this report.

Weekly Roundup Financial Report

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Weekly Roundup Financial Report

Загружено:

Авторское право:

Доступные форматы

WEEKLY GUIDANCE FROM OUR INVESTMENT STRATEGY COMMITTEE

How You Can Invest When Markets Are at All-Time

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 9

U.S. Small Cap Equity 11.1

U.S Large Cap Equity 10.2

U.S. Mid Cap Equity 7.1

MG&I 3AG Portfolio 2.6

U.S. High Yield Fixed Income 2.4

Public Real Estate 0.2

Developed ex - U.S. Equity 0.2

U.S. Municipal Fixed Income -0.6

U.S. Taxable Inv Grade Fixed Income -1.7

U.S. Treasury Fixed Income -1.7

Developed ex - U.S. Fixed Income -2.2

Emerging Market Fixed Income -3.9

Emerging Market Equity -7.6

Frontier Market Equity -11.3

-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 4 of 9

Brian Rehling, CFA

A shrinking Fed balance sheet

Developed Market $4,500,000

Ex.-U.S. Fixed Income $4,000,000

Emerging Market $1,500,000

Fixed Income $1,000,000

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 5 of 9

OPEC+ fails to appease markets as Iran sanctions loom

Still a “one sided” stock pickers’ market

are not suitable for all investors and 100

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 9 of 9

Scott Wren Key takeaways

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 2

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 2 of 2

Convergence—The Future for Global Interest Rates

1.5% GBP - OIS-implied overnight rates

Market expectations for central-bank policy rates through 2023

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 2

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 2 of 2

Potential Tariff Impacts on the Chinese Economy

Chinese exports to the U.S.

China's total economic output

Sources: Wells Fargo Investment Institute, Bloomberg, September 27, 2018.

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 5

Based on our “back-of-the-envelope” estimations, we believe that the short-term effect

Chart 2. U.S. business and consumer confidence is at multi-year highs

Sources: Wells Fargo Investment Institute, Bloomberg, September 27, 2018.

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 2 of 5

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 3 of 5

Date Country Report Estimate Previous

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 4 of 5

© 2018 Wells Fargo Investment Institute. All rights reserved. Page 5 of 5

Вам также может понравиться