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Please see important disclosures on last page. Prudent Investing in an Environment of Rising Interest Rates and Economic Uncertainty Jeffrey M. Piliero,

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Presentation on theme: "Please see important disclosures on last page. Prudent Investing in an Environment of Rising Interest Rates and Economic Uncertainty Jeffrey M. Piliero,"— Presentation transcript:

1 Please see important disclosures on last page. Prudent Investing in an Environment of Rising Interest Rates and Economic Uncertainty Jeffrey M. Piliero, CFA, CFP ®, ChFC Regional Investment Manager Wells Fargo Private Bank October 10, 2013

2 Economic Overview

3 3 Key Macroeconomic Trends A Cloud of Uncertainty Hangs Over the Economy Unprecedented changes in fiscal and monetary policy Persistence of large budget deficits New regulations regarding healthcare and financial services Investment and hiring decisions have higher hurdle rate The recovery has had a hard time gaining momentum Below Trend GDP Growth Bolsters the Case for the New Normal Real GDP growth has averaged 2.2 % GDP is well below 3.3% 25 year average Stimulus measures have yet to close gap View that slower growth may be the New Normal QE Has Boosted Asset Prices But Not Underlying Fundamentals Stimulus has helped drive interest rates lower Stock market has also benefited QE has also led to speculative activity Home prices rising even when homeownership is declining Slower Global Growth Has Pulled Commodity Prices Lower Manufacturing activity has slowed around the world We expect the Eurozone to begin to recover later this year Chinas economy likely to gradually regain momentum Lower commodity prices will limit global inflation increase Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

4 4 Economic Growth Still a considerable amount of uncertainty regarding global economic growth, fiscal policy and the willingness of businesses and households to commit to major capital purchases Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

5 5 GDP Components Residential investment has swung to a positive in the economic outlook, while government spending remains a drag on economic growth Source: U.S. Department of Commerce and Wells Fargo Securities, LLC GovernmentResidential Investment

6 6 Output Gap The actual trajectory of GDP growth now looks more like a trend than a temporary deviation from long run potential growth Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

7 7 Fed Policy Even with the Fed apparently set to begin tapering its monthly securities purchases, higher short-term interest rates are still more than 1 year away Source: Federal Reserve and Wells Fargo Securities, LLC Pace of FirmingTiming of Firming

8 8 Federal Reserve Balance Sheet The massive expansion of the Feds balance sheet has lifted asset prices and has also given the economy a boost Source: Federal Reserve Board and Wells Fargo Securities, LLC

9 9 Market Rates Long-term interest rates have risen as the timetable for winding down QE has been shortened Source: IHS Global Insight and Wells Fargo Securities, LLC

10 10 CPI Inflation Past experience teaches us that todays low inflation environment in no way precludes an acceleration later Source: U.S. Department of Labor and Wells Fargo Securities, LLC

11 11 Consumer Related Rising stock prices have helped bolster household finances at a time when real incomes are barely growing. The uneven distribution of these gains is one reason consumer confidence has struggled and some low-end retail chains have suffered. Source: U.S. Department of Commerce, Conference Board and Wells Fargo Securities, LLC Consumer ConfidenceHousehold Wealth

12 12 Unemployment Unemployment has not provided as clear of a read on the labor market as it has in the past Source: U.S. Department of Labor and Wells Fargo Securities, LLC

13 13 Homebuilding We continue to look for a gradual recovery in homebuilding. Apartments are playing a larger role than in previous building cycles. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

14 14 Home Prices vs. Homeownership Homeownership continues to fall at a time when home prices are rising, raising some concerns about the sustainability of recent price appreciation Source: S&P, U.S. Department of Commerce and Wells Fargo Securities, LLC

15 Percent change in real GDP by state ID 0.4 AR 1.3 AL 1.2 ME 0.5 KS 1.4 SD 0.2 OH 2.2 WI 3.5 AZ 2.6 NH 0.5 MT 2.1 MS 2.4 OK 2.1 NV 1.5 IL 1.9 GA 2.1 FL 2.4 CO 2.1 CA 3.5 NE 1.5 MO 2.0 UT 3.4 NM 0.2 WA 3.6 IA 2.4 MI 2.2 LA 1.5 VA 1.1 TX 4.8 PA 1.7 IN 3.3 NC 2.7 MN 3.5 KY 1.4 VT 1.2 TN 3.3 OR 3.9 NY 1.3 WV 3.3 ND 13.4 SC 2.7 WY 3.3 AK 1.1 CT -0.1 DE 0.2 HI 1.6 MA 2.2 MD 2.4 NJ 1.3 RI 1.4 DC 0.7 U.S. = – – – – –1.5

16 16 Florida Employment Picture Nonfarm payrolls remain 6.4 percentage points below their prerecession peak. Source: U.S. Department of Labor and Wells Fargo Securities, LLC

17 17 Florida Economy

18 18 Florida Unemployment Rate by County Source: US Department of Labor and Wells Fargo Securities, LLC Florida Unemployment Rate June 2013 Less than 5.5% Greater than 8.5% 6.5% to 7.5% 7.5% to 8.5% 5.5% to 6.5%

19 19 Employment by Industry Source: US Department of Labor and Wells Fargo Securities, LLC

20 20 Florida – Labor Market Florida employment growth may be slightly stronger than originally reported. The unemployment rate continues to fall. Source: U.S. Department of Labor and Wells Fargo Securities, LLC Unemployment Rate Employment

21 21 Florida – Housing Market Florida home prices are in line with the national average. Homebuilding has increased modestly. Source: CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC Housing PermitsHome Prices

22 22 Geopolitical Tensions The Return of Housing Speculation Credit Availability & Financial Reform China Slowdown Deleveraging Monetary/Fiscal Policy Uncertainty Immigration Reform Energy/Commodity Price Swings Issues to Watch

23 23 Our Forecast

24 24 Investment Discipline and Strategy

25 25 Market Sentiment/Leading Indicators Source: Bloomberg, ICI

26 26 Market Sentiment/Leading Indicators Source: FactSet; Investment Company Institute

27 27 Asset Performance The latest bull market is off to a good start, but history shows we could be only in the early stages. Source: Bloomberg

28 28 Strategic Asset Allocation 77% Key Drivers of Return Variability Tactical Asset Allocation 6% Security Selection 10% Source: Wells Fargo; The Journal of Wealth Management, Vol. 8, No. 3, Strategic Asset Allocation and Other Determinants of Portfolio Returns, 08/05, data updated August 2009 A Dynamic World Requires Discipline Strategic asset allocation is the dominant driver of a portfolios return variability Other 7%

29 29 With interest rates at historical lows, bonds may now present price risk to investors. Bonds Can Be Risky Too Source: Bloomberg Finance LLP, 01/31/13 Yield (in percent) U.S. 10-Year Treasury Yield

30 30 Risk is Far More than Volatility Source, Wells Fargo Private Bank, 06/10 Manage Risk Across Different Categories RiskOptics ® Risk Comes in Many Forms

31 31 Opportunities to Generate yield Look beyond traditional income-generating assets Past Performance is no guarantee of future results. Source: FactSet, Bloomberg, as of 01/31/13 Diversifying Cash Flow Opportunities Traditional Safe Fixed Income Inflation Assumption Yields Vary Greatly Yield (in percent)

32 32 Dividends Provide Yield and Growth Dividends have accounted for 43 percent of S&P 500 returns Past Performance is no guarantee of future results. Source: Morningstar Encorr, as of 12/31/2012 Yield (in percent) S&P 500 Total Return

33 33 Asset Performance Diversified Strategic Allocations Have Recovered from the Downturn Source: WMG Research; Morningstar

34 34 Key Investment Themes

35 35 Global ConsumersThe Engine of Growth Source: Wells Fargo Wealth Management, 01/13 Wages trending higher in emerging markets Economic growth and urban migration can increase the middle class Emerging markets nations boosting consumption; frontier-market nations just entering global market Emerging/frontier economies have attractive demographics Strategies Consider emphasizing growth assets Focus on companies serving price-conscious Emerging Markets consumers and wealthy Asians Look for strong brands, technology, and segmentation Overweight consumer goods companies that sell to emerging and frontier markets

36 36 VelocityRight Direction/Wrong Speed Source: Wells Fargo Wealth Management, 01/13 Developed countries held back by too much debt, reactionary policy Emerging countries more agile, economies still growing strongly Innovation is fast-paced, internet, energy production, increasing business efficiency Strategies Add emerging & frontier markets to mix for growth opportunities where appropriate Invest in companies/industries positioned to benefit from innovation in technology or business practices Overweight technology, telecom, consumer discretionary, and materials Underweight developed market debt, especially U.S. Treasuries

37 37 A Dynamic World Requires Discipline and Flexibility Source: Wells Fargo Wealth Management, 01/13 Governmental response to various crises, such as the Eurozone debt crisis, unrest in the Middle East, and slowing growth in emerging economies, could change the short-term outlook for returns Tax code changes in U.S. require planning review Strategies Discipline: develop diversified strategic allocation Flexibility: implement tactical tilts to take advantage of temporary opportunities - Reduce Fixed Income; Add to Equities Safety: maintain liquidity to avoid having to sell on unfavorable terms Avoid risk exposure drift

38 38 Balancing Risk Preference with Risk Needs Some complementary strategies may be available to pre-qualified investors only. Source: Wells Fargo Wealth Management, 01/13 Positive real return is needed to meet goals Consider risk beyond volatilityRiskOptics ® Strategies Control risk via broad diversification, including complementary strategies Employ assets with the ability to keep up with inflation equity and real assets Do not reach for return by accepting excess risk

39 39 Disclosures Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. The information and opinions in this report were prepared by the investment management division within Wells Fargo Private Bank. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Private Banks opinion as of the date of this report and are for general information purposes only. Wells Fargo Private Bank does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. This material is for general information only, is not suitable for all investors and is not soliciting any action from any particular investor. Information and opinions presented have been obtained or derived from sources we believe reliable, but we cannot guarantee their accuracy or completeness. Opinions represent WFBs judgment as of the date of the report and are subject to change without notice. WFC affiliates may issue reports or have opinions, which are inconsistent with, and reach different conclusions from, this report. This report is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities mentioned. Wells Fargo & Company and/or its affiliates may trade for their own accounts, be on the opposite side of customer orders, or have a long or short position in the securities mentioned herein. The investments discussed or recommended in this report are not insured by the Federal Deposit Insurance Corporation (FDIC) and may be unsuitable for some investors depending on their specific investment objectives and financial position. Past performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments also may fluctuate. There is always the potential for loss as well as gain. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Investing in foreign securities presents certain risks that may not be present in domestic securities and may not be suitable for all investors. Real estate investment carries a certain degree of risk and may not be suitable for all investors. Some real assets may be available to pre-qualified investors only. Some alternative investments and complementary strategies may be available to prequalified investors only. Hedge strategies and private investments may be speculative and involve a high degree of risk. Hedge strategies and private investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. There is no secondary market for the investors interest in a hedge fund or private equity investment and none is expected to develop. There may be restrictions on transferring interests in a hedge fund or private equity investment. Fixed income securities are subject to availability and market fluctuation. These securities may be worth less than the original cost upon redemption. Certain high-yield/high-risk bonds carry particular market risks and may experience greater volatility in market value than investment grade corporate bonds. Government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from certain municipal bonds may be subject to state and/or local taxes and in some instances, the alternative minimum tax.

40 40 Disclosures (cont.) Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Unlike U.S. Treasuries, municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending in the specific issuer. Corporate bonds generally provide higher yields than U.S. Treasuries while incurring higher risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your tax preparer submits your return. You cannot invest directly in an index. The Institute of Supply Management (ISM) Purchasing Managers Index gauges internal demand for raw materials/goods that go into end-production. An index values over 50 indicate expansion; below 50 indicates contraction. The values for the index can be between 0 and 100. You cannot invest directly in an index. The S&P/Case-Shiller ® U.S. National Home Price Index is a broad, market value-weighted composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly. S&P 500 Index is a capitalization-weighted index calculated on a total-return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies. S&P Midcap 400 Index is an unmanaged capitalization-weighted index of common stocks representing all major industries in the mid-range of the U.S. stock market. S&P Small Cap 600 Index is an unmanaged capitalization-weighted index of common stocks representing all major industries in the small-cap (between $300mn and $2 billion) are of the market. The Market Volatility Index (VIX) is an index designed to track market volatility as an independent entity. The index calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism. Wilshire 5000 ® Equity Index is an unmanaged index made up of all U.S. stocks regularly traded on the three major U.S. exchanges, including the New York Stock Exchange, American Stock Exchange, and Nasdaq. Russell 1000 ® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

41 41 Disclosures (cont.) Russell 1000 ® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Russell 2000 ® Index measures the performance of the 2,000 smallest companies in the Russell 3000 ® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 ®. Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2007 the MSCI EAFE Index consisted of 21 developed-market country indices. MSCI Europe, Australasia, Far East & Canada Gross Return Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. Morgan Stanley Capital International (MSCI) Emerging Markets Global Index is a market capitalization-weighted benchmark index made up of equities from 29 developing countries. FTSE NAREIT Equity REIT Total Return Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market. Equity Hedge: Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques. Relative Value Arbitrage: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Short Term Asset Management (STAM) is designed for investors seeking professional assistance in managing short-term fixed-income portfolios with an average maturity of generally less than one year. Additional information is available upon request. © 2013 Wells Fargo Bank, N.A. All rights reserved.


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