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Wells Fargo: Time to look at gold and bonds, major volatility coming in 2020

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Wells Fargo: Time to look at gold and bonds, major volatility coming in 2020

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(Kitco News) Making trading decisions based on the daily headlines could lead to poor results, said Wells Fargo in the latest report that focuses on investment strategies amid market uncertainty.

Defensive assets have historically been the ones to choose during the times of heightened uncertainty and equity downturns, wrote Wells Fargo head of Global Market Strategy Paul Christopher.

“Trading driven by day-to-day news may produce poor investment outcomes and potentially create emotional stress,” Christopher said. “We recommend investors incorporate defensive strategies into portfolios to help navigate through uncertain times.”

The current U.S. economic expansion cycle has been the longest since the mid-19th century — 126 months, which means that an economic downturn could be just around the corner, said Wells Fargo.

“While we do not expect an imminent end to the current economic expansion, the economy is beginning to slow, and we foresee significant bouts of equity market volatility in the coming year,” said Christopher. “Eventually, an economic recession is likely, although probably not in the next 12 months. Recessions are a normal and expected part of economic and market cycles.”

Come 2020, it will be crucial to balance portfolios with assets such as gold, U.S. Treasury bonds, and low-volatility equities in order to mitigate risks from slower growth.

“Between January 1926 and September 2019, U.S. Treasury bonds, precious metals (such as gold), and certain hedge fund strategies outperformed equities from the 12 months before a recession and up to the first half of a recession. Over this period, these assets maintained positive returns—even when equities experienced significant loss,” Christopher pointed out.

Wells Fargo also suggests looking at high-quality stocks in Information Technology, Consumer Discretionary, and Financials sectors.

Rebalancing portfolios is key by taking profits from equities and reallocating them into other asset classes. “Today, with the S&P 500 near a record high, investors have an opportunity to trim positions and reallocate cash towards asset classes and areas that may outperform a large and broad equity exposure in the coming year,” Christopher explained.

Investors who trade with their emotions next year face endangering their financial goals, the bank warned. “We favor a more proactive approach, taking control of the portfolio by thoughtfully and regularly considering where diverging valuation and price may create excessive risk,” said Christopher.

This summer, Wells Fargo repeatedly cautioned investors from buying too much gold when the metal was trading north of $1,500 an ounce, arguing that while gold is one of the best assets to own in times of economic uncertainty, it was too expensive.

“Market volatility is on the rise—and as history would suggest—investors are flocking to gold … The problem is that some investors do not understand gold, which can be dangerous. Flock to gold at the wrong time, and it can be painful—possibly for years,” said Wells Fargo head of real asset strategy John LaForge. “Timing is key with gold. We do believe that gold has a place in a well-diversified portfolio most of the time.”

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