Investors Should Stick to ‘More Defensively Positioned Asset Allocation’ For Now, Wells Fargo Investment Institute Says

Investors in the US stock market should maintain a “more defensively positioned asset allocation” while awaiting clarity on the direction of inflation and interest rates, Wells Fargo Investment Institute said in a report Tuesday.

The firm advised investors to prioritize quality and liquidity in equities and fixed income and maintain broad exposure to commodities in the meantime.

As headwinds emerge in the current economic cycle amid low household savings, rising credit-card delinquency rates, and the lagged effect of higher interest rates on credit-sensitive sectors, a more noticeable growth slowdown is expected in the second half of the year, the report said.

Wells Fargo said the downturn is, however, being cushioned and delayed by “unusually accommodative financial conditions” amid the ongoing “rapid” disinflation in the US and an “early reprieve” from high borrowing costs. It said an “abnormally low level of financial stress” thus prevails in the economy.

“Ultimately, we believe abnormally low financial stress should serve as a shock absorber rather than prevent a gradual wind-down in economic activity altogether,” it said. “Once markets gain more clarity on the future path of inflation and interest rates, we anticipate opportunities to dial up risk in portfolios.”

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