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Pro: Prioritize income
In an uncertain global environment, Wells Fargo Investment Institute advises investors to prioritize income in their portfolios. With interest rates expected to remain elevated as inflation shows signs of picking up, the Federal Reserve held rates steady at its June meeting, and markets anticipate no further cuts this year. Darrell Cronk, president of Wells Fargo Investment Institute, highlighted income as a key focus in the bank’s midyear outlook, noting risks including inflation, income replacement, stock market concentration, the U.S.-Iran war and high oil prices, a new Fed chair, and mid-year election impacts on fiscal policy. To build resilient income, the institute recommends diversifying across asset classes. Tracie McMillion, head of global asset allocation strategy, stressed that income-focused portfolios now require multi-asset class streams, not just bond ladders. She favors dividend stocks in sectors like financials, industrials, and utilities, which benefit from inflation and pay above-market dividends, while diversifying away from technology concentration. Within fixed income, Wells Fargo prefers intermediate maturities of three to seven years for attractive income without long-term interest rate risk. High-quality assets are emphasized due to increasing credit dispersion. The firm recommends investment-grade corporate bonds, particularly in defensive sectors like telecommunications and utilities, citing solid fundamentals and attractive yields. Securitized credit, including mortgage-backed and asset-backed securities, offers strong income with shorter durations. Municipal bonds are also attractive for tax-efficient income and strong fundamentals, with a preference for local general obligation and essential revenue bonds. Additionally, Wells Fargo suggests taking advantage of market pullbacks to allocate to emerging market bonds, which offer higher yields. While not high quality, BB-rated high-yield bonds are recommended as portfolio diversifiers, given their strong business profitability and liquidity.