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Jeffrey M. Piliero, CFA, CFP®, ChFC

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Presentation on theme: "Jeffrey M. Piliero, CFA, CFP®, ChFC"— Presentation transcript:

1 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 Key Macroeconomic Trends
The recovery has had a hard time gaining momentum 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 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 China’s 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 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
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 Residential Investment
GDP Components Residential investment has swung to a positive in the economic outlook, while government spending remains a drag on economic growth Residential Investment Government Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

6 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
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 Source: Federal Reserve and Wells Fargo Securities, LLC
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 Timing of Firming Pace of Firming Source: Federal Reserve and Wells Fargo Securities, LLC

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

9 Source: IHS Global Insight and Wells Fargo Securities, LLC
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 Source: U.S. Department of Labor and Wells Fargo Securities, LLC
CPI Inflation Past experience teaches us that today’s low inflation environment in no way precludes an acceleration later Source: U.S. Department of Labor and Wells Fargo Securities, LLC

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. Household Wealth Consumer Confidence Source: U.S. Department of Commerce, Conference Board and Wells Fargo Securities, LLC

12 Source: U.S. Department of Labor and Wells Fargo Securities, LLC
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 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
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 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 2011-2012
WA 3.6 VT 1.2 ME 0.5 MT 2.1 ND 13.4 OR 3.9 MN 3.5 NH 0.5 MA 2.2 NY 1.3 ID 0.4 SD 0.2 WI 3.5 WY 3.3 MI 2.2 RI 1.4 CT -0.1 IA 2.4 PA 1.7 NJ 1.3 CA 3.5 NV 1.5 NE 1.5 OH 2.2 IN 3.3 DE 0.2 UT 3.4 IL 1.9 CO 2.1 WV 3.3 VA 1.1 DC 0.7 KS 1.4 MD 2.4 MO 2.0 KY 1.4 NC 2.7 TN 3.3 OK 2.1 AZ 2.6 NM 0.2 AR 1.3 SC 2.7 AL 1.2 MS 2.4 GA 2.1 TX 4.8 LA 1.5 U.S. = 2.5 3.3–13.4 -0.1–1.2 2.2–3.3 1.5–2.2 1.2–1.5 FL 2.4 AK 1.1 HI 1.6

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 Florida Economy We believe that a disciplined strategy is important especially during periods of great change like we’ve seen over the past five years.

18 Unemployment Rate by County
Florida Unemployment Rate by County 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% Source: US Department of Labor and Wells Fargo Securities, LLC

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

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

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

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

23 Our Forecast

24 Investment Discipline and Strategy
We believe that a disciplined strategy is important especially during periods of great change like we’ve seen over the past five years.

25 Market Sentiment/Leading Indicators
Data: Money market mutual funds net market value Range: 1993-Present Frequency: Monthly Updated: 9/16/2013 Source: FactSet Notes: Source: Bloomberg, ICI

26 Market Sentiment/Leading Indicators
Data: Net Money Market Mutual Fund Flows for a given month. Range: 10-Year Rolling Frequency: Monthly Updated: 9/16/2013 Source: FactSet; Investment Company Institute Notes: Source: FactSet; Investment Company Institute

27 Asset Performance The latest bull market is off to a good start, but history shows we could be only in the early stages. Data: Various measures of previous Bull/Bear market periods Updated: 9/16/2013 Source: Bloomberg Finance, LLP Source: Bloomberg

28 A Dynamic World Requires Discipline
Strategic asset allocation is the dominant driver of a portfolio’s return variability Key Drivers of Return Variability Tactical Asset Allocation 6% Strategic Asset Allocation 77% Security Selection 10% We advise investors that the starting point in meeting long-term goals lies in appropriate asset class diversification for their specific circumstances. A study conducted by Wells Fargo Private Bank in 2005 and updated in 2009, showed that strategic asset allocation accounts for 77 percent of the variability of portfolio returns. Good tactical asset allocation and security selection do play a part. But it’s a much smaller part. Choosing an appropriate strategic asset allocation is still by far the most important decision an investor can make. Other 7% 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

29 U.S. 10-Year Treasury Yield
Bonds Can Be Risky Too With interest rates at historical lows, bonds may now present price risk to investors. U.S. 10-Year Treasury Yield Yield (in percent) That is because yields on U.S. Treasury bonds have dropped from over 15 percent in 1981 to just 1.76 percent in That kind of decline in interest rates cannot happen again. Investors in today’s bonds are receiving just 2.0 percent, not the higher rates that helped these bonds outperform over the past two decades. In our view, it is more likely that bond yields will rise from here rather than continue to fall. Rising bond yields mean declining bond prices. That means bonds can be risky too! Source: Bloomberg Finance LLP, 01/31/13

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

31 Opportunities to Generate yield
Look beyond “traditional” income-generating assets Yields Vary Greatly Yield (in percent) Diversifying Cash Flow Opportunities Traditional “Safe” Fixed Income Inflation Assumption With cash and government bonds yielding so little, we suggest looking at income-generating investment opportunities across the global credit and capital spectrum. Within traditional fixed income, consider municipal bonds, which are currently yielding slightly more than Treasuries while providing a tax advantage to investors. Our outlook for many municipalities is improving, based on strong growth in tax revenues and sizable budget cuts at the state and local levels. Corporate bonds (both investment-grade and high-yield), which can provide higher yields than Treasury bonds and may also be less sensitive to swings in interest rates. Although the high-yield corporate bonds may be vulnerable to short-term swings in the equity market, their outsized yield provides a cushion for total-return investors. Foreign bonds may offer higher yields as well, as credit and currency diversification. We like the credit fundamentals and valuations in emerging-market bonds and suggest favoring these over developed-market bonds until the European debt crisis abates. Data Source: FactSet, 7/12 Past Performance is no guarantee of future results. Source: FactSet, Bloomberg, as of 01/31/13

32 Dividends Provide Yield and Growth
Dividends have accounted for 43 percent of S&P 500 returns S&P 500 Total Return Yield (in percent) Let’s move on to stocks. In a low interest rate environment, investors can diversify their income streams by investing in dividend-paying stocks. In fact, right now, the S&P 500, MSCI EAFE Index, and the MSCI Emerging Markets Index are all yielding more than a 10-year Treasury bond. Of course, the risks associated with buying stocks are much different from those associated with a Treasury bond, so an investor’s tolerance for risk has to be a primary consideration. In the equity markets, we suggest being sufficiently allocated to global dividend-paying stocks. Since 1930, dividend-paying stocks have accounted for 43 percent of the total return of the S&P 500. In 2011, dividends accounted for 100 percent of total returns!  Misc. Data S&P 500 Dividend Yield (12/01/2012) 25 Yr. Average 2.24% 50 Yr. Average 3.05% Current % MSCI EAFE (12/01/2012) Current % MSCI EM (12/01/2012) Current % US 10 Yr Treas. Yld % Data Source: FactSet, 12/12 Past Performance is no guarantee of future results. Source: Morningstar Encorr, as of 12/31/2012

33 Asset Performance Diversified Strategic Allocations Have Recovered from the Downturn Data: Performance of hypothetical portfolios. Each investment objective is based on a 4-asset class portfolio (Fixed Income/Equities/Real Assets/Complementary Strategies) excluding Private Equity. Exclusions are based on timing/availability of data. Asset performance is proxy-based. Investment objective weights are derived from published strategic weights per investment objective. As of 8/31/2013. Frequency: Monthly Updated: 9/16/2013 Source: WMG Research; FactSet Source: WMG Research; Morningstar

34 Key Investment Themes Our investment themes for 2013 explore areas where we see growth opportunities, such as emerging and frontier markets, and innovative companies. We acknowledge the myriad of uncertainties in the current economic environment and advise investors to build flexibility into a disciplined investment process, balance risk preference with risk need, and develop investment acumen to help make informed decisions about investing.

35 Global Consumers—The Engine of Growth
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 Our first theme describes where we see future global growth originating: with global consumers and especially the growing ranks of the global middle class. Demographics drive consumer behavioral shifts. For aging populations, such as those in developed markets, healthcare and medical expenditures are often the main drivers of consumption. However, what gets multinational companies and investors excited in today’s world is capturing the attention of the rapidly growing global middle class. We are emphasizing investment in growth assets such as stocks and commodities with particular consideration of consumer companies that sell to emerging markets’ consumers. Look for strong brands, effective use of technology, and segmentation. Source: Wells Fargo Wealth Management, 01/13

36 Velocity―Right Direction/Wrong Speed
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 Around the globe, policymakers have found that growing the global economy is a bit like driving with a heavy load. The global economy may be heading in the right direction: it is growing but the speed at which it is traveling is frustratingly slow. In our second theme, we contrast the velocity of policy decisions and the velocity of growth with the velocity of innovation. Developed economies are holding back global growth because of their heavy debt loads and reactionary policy, whereas emerging counties have more room for growth. We are overweighting technology, telecom, consumer discretionary, and materials: sectors that stand to benefit from stronger growth in emerging economies and innovation in technology and/or business practices. Source: Wells Fargo Wealth Management, 01/13

37 A Dynamic World Requires Discipline and Flexibility
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 In our third theme, we acknowledge the myriad uncertainties investors face as we move into We believe that drawing upon a disciplined process to build a solid portfolio of global assets is the best way for most investors to meet their financial goals; however, it is particularly important in times of great change for investors to keep their portfolios flexible enough to make adjustments as future events unfold. Source: Wells Fargo Wealth Management, 01/13

38 Balancing Risk Preference with Risk Needs
Positive real return is needed to meet goals Consider risk beyond volatility―RiskOptics® 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 If the investment reward were the same for all assets, everyone’s risk preference would be zero. But just as the risks are not the same for all assets, neither are the rewards. We believe that, much like life, investing is about achieving the appropriate balance between risk and reward. In our fourth theme, we invite investors to examine risks and evaluate what types of risk are necessary to include in their portfolios to accomplish their longer-term financial goals. Some complementary strategies may be available to pre-qualified investors only. Source: Wells Fargo Wealth Management, 01/13

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 Bank’s 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 WFB’s 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 investor’s 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 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 Manager’s 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 © 2013 Wells Fargo Bank, N.A. All rights reserved.
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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