Wells Fargo's Midyear Outlook: Projects CPI to Average 3.8%, US 10-Year Above 2%, Weaker Dollar and Says Focus on Cyclicals

June 15, 2021 9:37 AM EDT

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Wells Fargo Investment Institute (WFII) published Tuesday its “2021 Midyear Outlook: Fuel for Growth,” calling for boosted U.S. economic recovery driven by vaccination programs against coronavirus, hopes for increased spending of private savings accumulated in 2020, record-low interest rates, as well as the prospect of a number of government support initiatives.

The outlook report also points out potential concerns regarding surging inflation rates, tax rates, and interest rates. However, Wells Fargo doubts these issues could seriously affect the economic recovery or opportunities noted in the report.

“There is a powerful macro mosaic at work with a steadily weakening U.S. dollar, rising commodity prices, strong global equity returns, low-interest rates, a robust fiscal stimulus push, and falling equity and bond volatility,” said Darrell Cronk, president of WFII and CIO of Wells Fargo Wealth & Investment Management.

“Strong market trends also can produce wide market divergences, making diversification and a disciplined plan to allocate cash valuable allies.”

The institute also said it expects the U.S. to spearhead the global economic expansion that boosts global economic growth to a 48-year high in 2021 before it drops to a more sustainable pace over the next year.

WFII also expects the U.S. and global inflation will follow global economic growth to outstrip pre-pandemic levels in 2021 and 2022. Such a sharp economic recovery could back record corporate earnings this year and 2022, driving equity prices to new all-time peaks. GDP year-end 2021 forecast is 7.0% and 3.8% for CPI.

“The main concerns are the rates issues — inflation rates, tax rates, and interest rates. We expect all three to rise over the next 18 months. Demand is outstripping supply in many industries, and the friction is leading inflation and interest rates to recover to pre-pandemic levels, or higher. We expect some dampening effect from all three. Even so, at this early juncture of the recovery, and considering the proposed tax changes, these issues seem very unlikely to douse the economic recovery or the opportunities we describe in this report,” Cronk added.

On global trends, Cronk stresses:

“We expect a U.S.-led global economic boom in 2021, before the pace shifts to a still-strong but more sustainable pace next year. U.S. and global inflation in 2021-2022 also should exceed their pre-pandemic pace. A significant U.S. dollar downtrend should reemerge by early 2022, consistent with narrowing economic growth differentials with other major economies and substantial widening U.S. trade and budget deficits.”

Investors are urged to be selective in the stock market given the higher rates expectations.

“Strong economic growth prospects give us a cyclical bias. We prefer U.S. Large Cap Equities, U.S. Small Cap Equities, and Emerging Market Equities and cyclical sectors favoring Communication Services, Energy, Financials, Industrials, and Materials.”

“We expect a growing divergence between asset classes (equities/commodities and fixed income), currencies (the U.S. dollar and other currencies), and sectors (growth- and cyclically-oriented sectors),” it is further added in the report.

Elsewhere, WFII projects crude oil prices to trade between $70 and $80 per barrel and S&P 500 between 4,400 and 4,600. The US 10-year yield is seen between 2% and 2.5%.

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