Why investors should rebalance their portfolios right now, according to Wells Fargo
Now is the time for investors to rebalance their portfolios, according to Wells Fargo. The firm suggests reallocating from stocks into select bonds since equity valuations have soared. The S & P 500 closed over 6,500 for the first time on Thursday, but slipped lower on Friday . “Even as the S & P 500 Index makes new all-time highs, investors may want to trim equity allocations to position portfolios ahead of the volatility we expect in the coming weeks and months,” Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, wrote in a note Tuesday. That rockiness could come from policy or economic surprises, he noted. In addition to moving into bonds, that money would shift within the stock portion as well, keeping within a general split of 60% equities and 40% fixed income, he said in an interview with CNBC. The right investments matter as the Federal Reserve nears potential rate cuts and longer-term inflation expectations tick higher, he noted. For instance, Christopher remains overweight on large-cap stocks but has trimmed positions in communication services to take some profit and reduce exposure in case the market is overextended. He kept his overweight in information technology and also took some money from small-cap stocks, which he said have run too far. Bullish on financials However, Christopher added exposure to financial stocks, which he said will benefit as short-term interest rates move lower when the Federal Reserve cuts rates. The market is currently pricing in an 87% chance the central bank will reduce the federal funds rate in September, according to the CME FedWatch Tool . “If short-term rates are going to fall and the economy is going to slow, that means that the yield curve is going to steepen,” Christopher said, noting that short-term yields will collapse but long-term yields won’t move too much. XLF YTD mountain Financial Select Sector SPDR Fund year to date “If you’re a bank, that’s a good situation for you, because now your cost of deposits — on the short end of the yield curve — has gotten cheaper, so you’re paying less money to your depositors,” he added. “On the other hand, the long-term yields that are, which is what you earn from your loans, those rates are staying more or less steady.” Stick with high-quality bonds As investors shift some of their stock gains into bonds, Christopher suggests investing in intermediate-term assets that are high in quality, like investment-grade corporate and municipal bonds. “Companies with good balance sheets, strong free-cash flow, good earnings prospects for the future — that’s quality,” he said. “We want to stick with that, because any volatility that we get between let’s say now and the end of first quarter ’26, we think that quality approach will deliver less volatility for those positions than if you …. just buy whatever is cheapest in the market.” Christopher uses a bullet strategy , investing in bond maturities of three to seven years. Unlike ladders that invest in multiple maturities, a bullet strategy focuses on assets that mature around the same timeline. “We’re worried about the short term because as the Fed does cut, you’ll see those rates come down,” he said. “Rates will get to a level in the mid threes, where they’re not even necessarily covering inflation anymore.” USIG YTD mountain iShares Broad USD Investment Grade Corporate Bond ETF year to date Meanwhile, in the long end of the curve he sees potential volatility as longer-term inflation expectations move higher and the Treasury likely issues more longer-dated coupons. The increase in inflation expectations could, in part, be a reaction to the possibility that the Trump administration will gain a majority of the Federal Reserve board appointees, he said. President Donald Trump’ s attempt to fire board member Lisa Cook has moved to the courts, which has yet to issue a ruling . “The fear would be if the Fed does become a creature of the administration, of any administration, Republican or Democrat, … then there’s always going to be pressure on the Fed to ease as the government wants to borrow more, and that would be inflationary over the longer term,” Christopher explained. However, even if the administration gains a majority, it doesn’t mean the president will get his way, he noted. The 50/35/15 portfolio For wealthy investors with about $2 million, adding a small portion of alternatives can make sense, Christopher said. That could look like a portfolio of 50% stocks, 35% fixed income and 15% alternatives, he said. Specifically, he likes hedge funds, private equity and private credit. He likened them to an insurance policy that can help steady portfolios over a long period of time. “You bridge over the choppy waters and uncertainties of the policy and the economy slow down here in the coming quarters,” Christopher said.
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