After the storm: Preparing for an altered investing landscape

Hilly landscape following a storm.

What investors should know to get ready for a post-pandemic world

Veronica Willis
Veronica Willis
Investment Strategy Analyst
Wells Fargo Investment Institute
As a Midwesterner, I’ve seen my fair share of the outcomes of major storms, including the one that blew off the roof of my elementary school in third grade! Debris strewn everywhere. Buildings destroyed. Trees upended. But then after a great deal of effort, we came out the other side. The mess was cleaned up, building restored, and trees were replanted. Simply stated, over time things got better.

However, here’s what’s important to note: Things were not exactly the same as they were before.

I think that a storm is a good analogy for COVID-19. It came through and shattered lives, jobs, and entire economies. And while we’re certainly not at the end of the pandemic, we seem to have reached the point where we expect things will gradually improve over the months ahead.

Thanks to many individuals’ hard work, effective vaccines are available and their distribution is ramping up. And, as is the case after a major storm, when we finally put the pandemic behind us, we don’t believe the world will reset to where it was. We expect it will be somewhat different.

It’s that changed landscape that we think investors need to prepare for now.

What will the new investing landscape look like?

At the Wells Fargo Investment Institute, we’ve been spending a lot of time thinking about the configuration of the new landscape.  Although we haven’t seen a pandemic on this scale for over a hundred years, we do think that we can learn from other similarly disruptive periods in our history.

As we’ve worked through different scenarios, I was interested to see that several trends began to emerge that favor areas of focus for me early on in my career, among them commodities. Driving these trends is a drop in supply as weaker companies have gone out of business and cheap debt.  Access to low-cost debt has allowed smaller companies to invest in new technologies, suggesting that they may emerge from the pandemic in a stronger position to compete.

It’s that changed landscape that we think investors need to prepare for now.

What do these trends mean for your investments?

In equities, we anticipated a shift away from investor interest in the growth and high-quality stocks that historically have characterized the end of an economic cycle. Instead, as the global economy begins to recover from the pandemic in the U. S. we likely will see a shift into small-cap stocks that typically perform better as economic growth begins to accelerate. As I’ve already mentioned, we already are seeing signs that small cap companies are well-positioned for the recovery.

We also anticipate the global economy, and specifically emerging markets, will grow faster than the U. S. Global diversification may be increasingly important to capture global equity gains as emerging markets potentially offer more attractive opportunities than developed markets.

As I referenced previously, commodities also are beginning to look attractive. Oil-price drops devastated weaker suppliers last year and supply levels likely will stay constrained in the near-term. The suppliers that remain may be slow to respond to the increased demand from a recovering travel industry and consumers resuming their daily routines. The lag effect should support higher prices. Agricultural commodities’ prices also may continue to climb on rising demand.

Unlike equities and commodities, fixed income investors may face increased headwinds. Today’s low-yield environment may continue for a while, so what should investors do if they need income? As the economy begins to recover, higher-yielding investments such as emerging market bonds and preferred securities may be worth considering: however, both of these types of investment come with increased risk so should be approached with caution.

Next steps

Market shifts are not always clean and uncertainty about the recovery may create volatility from time to time. We always recommend that investors stay broadly invested in a well-diversified portfolio aligned with their investment objectives to help minimize the impact of potential market declines.

For more detailed information on our outlook for the financial markets, I recommend you read our new report, “The new landscape: Investing in post-pandemic markets”.

Wells Fargo Investment Institute, Inc. is a registered investment sub advisor and wholly-owned subsidiary of Wells Fargo Bank, N. A. , a bank affiliate of Wells Fargo & co.