Wells Fargo encouraging risk-on investing in 2021

The economic brain trusts at Wells Fargo are banking on political gridlock in Washington and a vaccine for COVID-19 as key forces to improve the financial and economic outlook for 2021.

Speaking to reporters Tuesday, Darrell Cronk, president of Wells Fargo Investment Institute and chief investment officer of Wells Fargo Wealth & Investment Management, cited the “uniquely bullish backdrop” that includes a weakening U.S. dollar, tighter yield spreads and the potential for Washington gridlock.

Cronk, who was joined by a team of Wells Fargo senior executives for the annual outlook meeting, described the year ahead as a series of transitions that will likely include a shifting from a “virus to a vaccine, lockdown to reopening, and lackluster demand to pent-up demand.”

The outlook for 2021 includes a 3.8% economic growth rate, an inflation rate of 1.7%, a yield on the 10-year Treasury of between 1% and 1.5%, and an S&P 500 gain of between 3% and 8%.

Asked about his outlook if Democrats win both Senate runoff elections in Georgia and wind up with majorities in both Houses of Congress and the White House, Cronk was slightly more measured.

“If both those seats go Democrat, I think the stock market would perceive that as a slight negative,” he said. “But I don’t think the stock market is focused on the swing one way or the other.”

In essence, the potential of a slight majority in the Senate would not be enough to push through some of the extreme proposals that markets were worried about in November, when pundits were forecasting a “blue wave” that would have given Democrats significant majorities.

“That’s part of the reason we got such a strong risk-on mosaic in November,” Cronk said.

Citing the challenge of accomplishing the kind of tax reform that the Trump administration managed in 2016, Cronk said, there could be some tax-law changes “at the margin,” but “tax reform is off the table.”

With the political landscape taking shape and a vaccine on the near horizon, Tracie McMillion, head of global asset allocation strategy, said it is time to start moving off the sidelines and into select areas of the financial markets.

“Investors could be forgiven for holding cash in 2020, but they certainly weren’t rewarded for it,” she said. “Our suggestion for 2021 is take a disciplined approach and dollar-cost-average in, and also selectively increase risk.”

Taking on more portfolio level risk, McMillion explained, involves generally overweighing equities and underweighting fixed income allocations.

“Developed-market international equities is the only area where we’re not overweight equities,” she said, stressing large- and mid-cap stocks over small-caps, in a pursuit of higher-quality earnings.

On the bond side, Brian Rehling, head of global fixed income strategy, does not see the Federal Reserve raising interest rates next year because it will be unable to meet either of its objectives of lower unemployment and increasing inflation to target levels.

“Likely, we will probably see the Fed buying some longer maturities throughout the year,” he said.

With so much cash on the sidelines, Rehling said the “demand for yield is extensive” and “as the pandemic fades all that cash needs a home.”

“Those factors conspire to keep any increase in rates modest,” he said.

In the meantime, Rehling added, “The markets are drunk on liquidity.”

“No question, the markets turned on a dime back in March when it became clear the extent the Fed was going to go to inject liquidity and they’ve gone non-stop since then,” he said. “I don’t think 2021 will be the year they have to sober up. But we’ve seen what’s happened in the past when the Fed has announced it’s going to pull back. History has shown that it may cause a bit of a hangover in markets.”

But there’s always gold and other precious metals, according to John LaForge, head of real asset strategy.

“We still like gold and also ancillary metals, silver and platinum,” he said. “Gold, silver and platinum have gone through about 10 years of supply drying up. We like them all. We think negative real rates and money supply will help them all, but there are also the industrial uses for the metals.”