Change Your Thinking On Portfolio Construction

June 17, 2016

Brian Jacobsen, Ph.D., CFA, CFP, is chief portfolio strategist at Wells Fargo Funds Management. In addition to his role at Wells Fargo conducting research and giving presentations on the markets and the economy, Jacobsen is an associate professor at Wisconsin Lutheran College. His research and teaching center on economics, finance and investing. recently caught up with Jacobsen for his thoughts on the global economy and financial markets. Everyone is focused on the “Brexit” vote coming up next week. Do you think that it's a major risk for the global economy if the U.K. leaves the EU?
Brian Jacobsen:
I really don't. I tend to believe that the biggest risk is more to the financial markets as far as the sudden shifts in sentiment that can happen because of the uncertainty that's induced about how things will play out.

Economically, the effects are likely to be fairly minimal. If they do vote to leave, it triggers a two-year process by which they can basically negotiate the terms of their divorce. So they'll have to decide who gets the Crown Jewels, who gets the dog, that sort of thing.

But ultimately, they'll negotiate a relationship with the European Union that's very similar to what they currently have. But that doesn't mean the financial markets aren't going to react negatively to it.

To quote Thomas Hobbes, I would say that the market reaction could be "nasty, brutish, but short." I would view any adverse move as a buying opportunity. For those who are wondering if they should sell beforehand, I would encourage them to ride through it. You may just have to grit your teeth right on through the vote. Brexit aside, are any of your recession indicators flashing red right now?
When I look at the probability of going into a recession, over any given 12-month horizon, there's about an 18% probability of going into one; that's just sort of the historical average.

Right now, I think that we're about average for the likelihood of going into a recession. I don't like the fact that we had the weak payrolls number, but I'm encouraged by the fact that the manufacturing work week hasn't been contracting. That tends to be a very good leading economic indicator. I'm also encouraged by building permits staying relatively high. That tends to be a good leading economic indicator.

But on the flip side, you have the new orders for durable goods looking not all that great, and those tend to be good leading economic indicators as well. So things look kind of balanced. That's why I say the risks of recession are probably just about average right now.


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