Wells Fargo recommends rethinking portfolio structure: volatility ahead

Now is a good time to review the structure of investment portfolios, according to Wells Fargo. The bank recommends reallocating some funds from stocks to bonds after the broad market index S & P 500 on Thursday, August 28, for the first time closed above 6500 points. Valuations of risk assets have risen too much, and the market is expecting volatility in the coming weeks and months, Wells Fargo said.

Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, recommends that investors switch to an investment portfolio structure of 60% stocks and 40% bonds. This ratio is considered a classic portfolio because it combines a focus on capital growth with protection from market shocks.

"Even though the S&P 500 index is hitting all-time highs, it makes sense for investors to reduce the proportion of stocks in portfolios to prepare in advance for the volatility we expect in the weeks and months ahead," CNBC quoted Christopher's note last week as saying.

In his interview to the TV channel Christopher also recommended to revise the portfolio of shares. The analyst remains highly interested in securities of companies with high capitalization, but reduced investments in the sector of communication services in order to fix profit and reduce risks in case of market overheating. He left positions in information technologies sector unchanged, at that he partially withdrew funds from small-cap stocks, which, according to him, rose in price too much.

When shifting some of the gains from stocks to bonds, a Wells Fargo strategist advises investing in high-quality assets with medium maturities, such as investment-grade corporate bonds and municipal securities.

"Companies with strong balance sheets, solid free cash flow, good earnings prospects - that's what quality is all about," he said. - "You need to hold on to those securities, because in the event of volatility through the end of the first quarter of 2026, a quality-focused approach will provide less portfolio volatility than a strategy of buying everything cheapest in the market.

Christopher himself uses a bullet strategy, buying securities with maturities ranging from three to seven years. Unlike the ladder, which uses a wide range of maturities, the bullet focuses on a single horizon. "Our fear is short-term: when the Fed starts cutting rates, yields will go down. They will reach a level of about 3.5%, which will no longer cover inflation," he said.

Christopher sees risks associated with the growth of inflation expectations and the likely increase in the volume of bond issues with long maturities by the Ministry of Finance in the purchase of long-term bonds.

Among the political factors that threaten the market, Christopher noted the pressure on the US Federal Reserve from the White House. There is a risk that Donald Trump's administration will win a majority vote on the regulator's board of governors after attempting to remove Lisa Cook, one of the board members, the strategist warns. That decision by the president is now being reviewed in court.

"If the Fed becomes a tool of an administration - any administration, Republican or Democratic - it will always be under pressure to ease policy because the government needs to borrow. And that will mean higher inflation in the long run," Christopher explained.

Bank of America estimates that gold could rise to $4,000 an ounce in the short to medium term amid Trump's threats to the Fed. The metal has already risen in price by more than 30% since the beginning of the year. BofA also emphasizes that protective assets are winning amid political uncertainty, writes CNBC.

September is traditionally considered a bad month for the market. According to The Stock Trader's Almanac, it has been the worst month for the S&P 500, Dow Jones and Nasdaq since 1950. Over the past ten years, the S&P 500 index has performed particularly poorly in September, with an average decline of 0.7% for the month.

According to a CNBC poll, on average analysts expect the index to be at 6,392 points by the end of the year, with the median forecast at 6,500. Thus, being almost at the maximum, the index will start the month "in a vulnerable position", the channel believes.

The August jobs report, which will be released this week, will be a key test for the stock market, writes CNBC. Of particular importance for the Fed's decision on rates will be data on employment outside of agriculture. Wall Street is confident that a rate cut at the September 16-17 meeting is already a foregone conclusion, with the latest futures quotes accounting for a quarter percentage point decline. But now traders are wondering what to expect next.

The July jobs report has heightened fears that the U.S. economy could slow sharply due to duties, and the stock market is underestimating this for now, CNBC notes. The report will show whether these fears are justified or whether the U.S. consumer remains sufficiently resilient.

"Next week we'll know a lot more about the labor market situation. Is it just stagnation - low hiring and layoffs - or are we seeing the beginning of a real deterioration? - Gabelli Growth Innovators ETF portfolio manager John Belton told CNBC. - Historically, if the labor market started to deteriorate, that process would quickly intensify."

This article was AI-translated and verified by a human editor