Prepare now for the increased volatility to come as the economic expansion enters its 11th year and becomes the longest U.S. recovery on record. That’s one of the primary takeaways from the Wells Fargo Investment Institute’s new midyear market outlook.

“Start making incremental moves now, based on what is cheap and what is expensive,” said Paul Christopher, head of global market strategy for the investment institute. “Rebalancing is our No. 1 suggestion.”

Christopher noted that the equity weighting in many investors’ portfolios has drifted far from the preferred allocation in their financial plans, a result of the long-term rally in stocks, which has also entered its 11th year.

“Pay attention to what is no longer an attractive value in the portfolio,” said Christopher. “Look for something over its target price.”

At a meeting with reporters, Christopher expanded on strategies investors should consider in the second half of this year:

  • Sell some overvalued stocks on rallies and park the cash while waiting for better entry points in the coming months, but don’t raise more cash if the portfolio already is holding a  sizable amount of cash.
  • Generate income with equities that are increasing dividends rather than with real estate investment trusts, high-yield bonds and utilities. REITs and high-yield bonds are “unattractive now” and utilities are “very expensive. We’d be getting out of them.”
  • Consider long/short equity strategies and relative value credit strategies to hedge against volatility in the stock and bond markets, respectively. Accredited investors, defined as having earned income of $200,000 if single or $300,000 with a spouse or a net worth greater than $1 million excluding primary residence, can invest in private capital, hedge funds and private debt to ride out the volatility. Other investors can use alternative investment funds, including distressed debt funds. Christopher prefers private debt to private equity, which he said is expensive.
  • Consider niche strategies, especially in health care. Christopher referred to health care overseas resorts in Taiwan that are catering to wealthy Chinese.

In addition to these recommendations, Wells Fargo’s printed midyear outlook suggested that investors consider greater exposure to emerging market equities, including China stocks, and sectors with higher quality earnings such as technology and industrials.

The Wells Fargo Investment Institute is expecting slower growth in the next 12 months but no recession, with the U.S. GDP growing at 2% this year along with S&P earnings growth at 3.3%. Its year-end S&P 500 target is 2,850, which is 2.5% below Tuesday’s mid-afternoon level of 2,922.

Its strategists don’t expect the Fed will cut rates this week but rather in July or more likely September because the central bank will want to wait for developments in the U.S.-China trade dispute, said Christopher.

The U.S. has bumped up tariffs on about $200 billion worth of Chinese imports to 25% and is threatening to do the same on an additional $300 to $325 billion worth of goods.

In the meantime, hearings are underway in Congress about the U.S.-China trade dispute with testimony from U.S. corporate executives, and later this month President Donald Trump and China’s President Xi Jinping are expected to resume talks in a side meeting at the G-20 meeting in Japan.

Trump confirmed the meeting on Twitter on Tuesday; Xi’s office said he was “willing” to meet and agreed that the two sides should keep communicating, according to Chinese state media reports.

— Check out Former Fed Vice Chair Says Trump Threatens Fed’s Independence on ThinkAdvisor.