5 ways to thrive: The rest of 2019 is set to be rockier than the first half, and Wells Fargo says these strategies will help investors withstand the turmoil ahead
- Investors should consider five strategies to deal with a potentially turbulent second half of the year, says Wells Fargo Investment Institute Chief Global Asset Allocation Strategist Chris Haverland.
- He writes that the rest of the year may be difficult as earnings slip and economic growth slows. Several of his tactics are themed around diversifying and preparing for increased volatility.
- Haverland says investors should diversify with the benchmark S&P 500 at all-time highs just as corporate profits are expected to slip and economic growth is poised to slow.
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While investors might want to celebrate after a first half of the year that took stocks to record highs, it might be time to prepare for a stretch that's less fun.
Wells Fargo Investment Institute's Chief Global Asset Allocation Strategist Chris Haverland says in a note to clients that US economic growth will probably be closer to 2% than 3% for the year. That means weaker growth than it experienced in the first quarter of this year or in 2018 as a whole.
Meanwhile company profits, critical fuel for stock prices, are getting worse. FactSet says S&P 500 earnings are expected to fall 2.6% in Q2, which would mark a second consecutive quarter of declines.
The market has had its bouts of volatility recently, including in December 2018 and May of this year. And Haverland has devised five ways for investors to position themselves for a rockier global market.
Several of his ideas return to the theme of diversification after US stocks made such big gains.
Cash is still king
Cash was a surprisingly successful investment in 2018, and Haverland says it's going to be critical in the months ahead because a high cash balance gives traders a chance to take advantage of opportunities as they arise.
He adds that investors should use a cautious, balanced dollar-cost averaging strategy with any excess cash to make sure their portfolios are diversified. Dollar-cost averaging means investing consistent amounts and can position investors to benefit from price gains while protecting against losses.
Don't forget bonds
While bond yields remain exceptionally low, Haverland says fixed income should still play a role in any portfolio. Even if bonds are not providing huge amounts of income, he says their stability is important, and so is the diversification away from stocks.
He favors high-quality US bonds with a neutral duration relative to their benchmarks.
Stocks in emerging markets had a solid first half overall, but didn't perform nearly as well as large, mid- or small-cap US stocks or many major indexes in developed markets. Wells Fargo illustrates that outperformance with this chart.
"International equity valuations have become relatively attractive," Haverland wrote. "We continue to favor emerging market equities - and believe that accommodative global monetary policy and an eventual U.S.-China trade deal will be supportive."
Balance, balance, balance again
Haverland argues that the huge gains for stocks could pull an investor's portfolio out of wack and create dangerous imbalances if they're not careful. That means it's critical to monitor your holdings and rebalance them, especially after bouts of volatility.
Make volatility work for you
While hedge funds are having a hard time, Haverland said some of them are a good option for qualified investors as volatility rises and returns slip.
"Hedge funds offer the potential to profit in both up and down markets, which may be helpful in an environment with stock prices near all-time highs and bond yields near all-time lows," he said. "We continue to favor relative value, event driven and equity hedge strategies."
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