2023 marked another challenging year for portfolios as markets adjusted to sharply higher interest rates. Factors such as lingering inflation, post-pandemic distortions, and the lagged effect of Federal Reserve credit tightening have all contributed to this slow-motion slowdown — both in the U.S. and in some of the world’s major economies. The good news is, we believe that 2024 will mark an important pivot point for the global economy and capital markets.

We expect higher interest rates will continue slowing economic growth over the coming months. And so, we center our portfolio guidance around a theme of quality, until the slowdown finally cools inflation enough that the Fed can cut interest rates, and the global economy gains new momentum, likely in the second half of 2024. That’s the pivot point we’re expecting on the horizon.

We are pleased to offer our 2024 Outlook as a guide for investors through the transition to a new economic cycle.

We continue to prefer defensive portfolio positioning, but we believe opportunities to put money back to work should unfold with the calendar next year.

In equities, earnings are likely to sink with economic growth into early 2024. Profit margins will likely remain under pressure, as inflation keeps costs high, but the slowing economy drags down revenue. For now, we still favor high-quality U.S. large-cap equities.

Even though we expect that a corporate profit recovery will likely be a story mostly for 2025, equity prices should begin to anticipate in 2024 the turning point to stronger and more sustained earnings growth. For this reason, we will be looking for opportunities to position for an early-cycle pivot as the year progresses.

In the fixed income market, we expect U.S. Treasury yields to decline in the first half of the year as our forecasted economic slowdown deepens. We see this as an opportunity for many defensive fixed-income classes to produce positive returns. Later in the year, the evolving recovery should open opportunities in higher-yielding fixed-income sectors.

With an economic slowdown deepening, commodity prices will likely stagnate early in 2024 before resuming a rally by year-end due to tight supply underpinning a multi-year bull super-cycle. We are maintaining our favorable view of this asset class.

Finally, in the alternative investment space, we favor hedge-fund and private-capital strategies that are more defensive and do not move in tandem with traditional stock and bond markets. As the pivot point to recovery approaches, we will look to broaden exposure to strategies that we believe could benefit from stronger economic growth.

For more specific guidance across asset classes, sectors, and industries, as well as our top five portfolio ideas for next year, please read our special report: 2024 Outlook: A pivotal year for the economy and markets.

Risk considerations

Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

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. Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to interest rate, 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. 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. 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. Other risks associated with investing in listed

REITs include the use of leverage, unexpected reductions in common dividends, increases in property taxes, and the impact to listed REITs from new property development.

Alternative investments, such as hedge funds and private capital/private debt strategies, are not appropriate for all investors. Any offer to purchase or sell a specific alternative investment product will be made by the product's official offering documents. Investors could lose all or a substantial amount investing in these products.

Definitions

Bull super cycles are an extended period of time, historically 15-20 years, where commodity prices move upward together.

General disclosures

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. Do not use 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 Investment Institute, Inc., is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

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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.

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