Our Guidance in This Fast Start to the Year

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1 WEEKLY GUIDANCE FROM OUR I NVESTMENT STRATEGY COMMITTEE Paul Christopher, CFA Head of Global Market Strategy Asset Group Overviews Equities... 4 Fixed Income... 5 Real Assets... 6 Alternative Investments... 7 Our Guidance in This Fast Start to the Year» The year is off to a fast start, particularly for global equities and bond yields. January 29, 2018» With valuations elevated in a number of asset classes (particularly equities), we offer specific suggestions for investors looking to follow our advice to reallocate assets and invest based on value. What it may mean for investors» Our broader advice to remain fully invested in equities also has application amid the sharp, early gains for global equities. Our guidance mostly aligns with the most prominent market moves early this year. Broad increases in global equities and bond yields have marked a fast start to the year. The impressively broad global economic expansion is one driver. Investors also are taking new interest in the high-tax companies that should benefit the most from lower U.S. taxes. The high-tax corporate S&P 500 constituents outperformed the low-tax constituents by seven percentage points from September 8, 2017 through January 19, 2018 (Chart 1). This was the largest outperformance margin since investors (prematurely) anticipated tax reform after the 2016 U.S. elections. Whether the market wants to price in more anticipation depends, in part, on company guidance to come (more on that below). This week, we consider how the latest market movements offer investors potential opportunities based on our existing guidance. Chart 1. After a false start, investors are recognizing tax reform s importance Ratio of S&P 500 Index high- to low-tax constituent prices* /1/16 4/1/16 7/1/16 10/1/16 1/1/17 4/1/17 7/1/17 10/1/17 1/1/18 Sources: Bloomberg and Wells Fargo Investment Institute. Last day plotted is January 19, *A high-tax S&P 500 Index company is defined as one whose effective tax rate (i.e., tax rate after deductions and exemptions) is at least 30%. A low-tax company is defined as one with an effective tax rate below 30% Wells Fargo Investment Institute. All rights reserved. Page 1 of 9

2 Our Guidance in This Fast Start to the Year Our guidance roughly aligns with the sharp market moves this year Our guidance mostly aligns with the most prominent market moves early this year. Anticipating equity gains in 2018, we returned our overall recommended equity allocation to their long-term targets (evenweight) but maintained our underweight guidance for commodities. Further, equities have outperformed commodities year to date, and we expect that trend to continue. In addition, the cyclical equity sectors that we have favored since early 2017 (i.e., Consumer Discretionary, Industrials, and Financials) are among those that should benefit from tax reform. And while interest rates rise, we expect Utilities to continue underperforming. The Energy sector rally has run counter to our expectations. The late-year rally supported Energy company equities. We continue to expect that the Energy sector will return to lower price ranges, along with commodities, more broadly. U.S. producers already are gearing up to increase production, which should lower energy prices as the year progresses. In bonds, the U.S. Treasury yield curve remains relatively flat, but yields are rising among the short and longer maturities. The gradual rise in interest rates has been a headwind for real estate investment trusts (REITs), one of our overweight recommendations. Yet, we believe that low inflation will keep interest rates low. We expect that stronger economic growth (with a boost from the tax overhaul) will overcome the mild headwind from gradual and limited rate increases. Among alternative investment strategies, our preference for Equity Hedge and Relative Value strategies has had mixed results to date this month. Our overweight to Equity Hedge is outperforming other strategies (though not the S&P 500 Index). Yet, the Relative Value strategy returns, while strong on an absolute basis, are lagging returns of other strategies probably due to low market volatility and the negative high-yield credit positions that many managers utilize to hedge market risk. Keep perspective on the recent market movements Our main advice theme in our 2018 Outlook is to seek value. Investors can consider reducing exposure in high-yield bonds and in Energy equities where we believe prices are extended and reallocating to REITs, cyclical U.S. equities, or international equity markets, where we see more value. Secondly, we recommend that investors prioritize taking their equity exposures up to long-term targets across U.S. and international markets. Volatility eventually should return to create equity price swings but, even so, we still expect U.S. and international equity prices to make new highs in 2018 and probably beyond. To this point, tax reform and economic growth led us to raise our 2018 S&P 500 Index earnings forecast to $152 per share, up from $129 per share in We will watch company forward guidance as the year unfolds, beginning with the (current) earnings reports. As companies increase equipment spending, repatriate overseas earnings, and wage gains accelerate, we look for our expectations to be confirmed and to possibly extend growth beyond this year Wells Fargo Investment Institute. All rights reserved. Page 2 of 9

3 Our Guidance in This Fast Start to the Year Even with our favorable market view, political uncertainties also bear watching. It will be important to see how quickly Congress works through its protracted (and now postponed) budget impasse. This is not so much because a short-term shutdown would matter for the U.S. economy but because the rancorous budget debate potentially could spill over into upcoming congressional debates on trade, infrastructure, and the debt ceiling. What else investors can do now Against this backdrop of higher equity prices but (eventually) greater market volatility, we also recommend some general adjustments: Rebalance. Investors can become emotionally attached to successful investments, but at some point, new opportunities arise at better values. We have suggested some examples above. Rebalancing, or reducing profitable positions to recycle the cash into new opportunities, can help the portfolio to avoid concentrated positions and maintain desired risk levels. Often, investors are reluctant to take the gains for tax purposes, but rebalancing in tax-advantaged accounts could offset this disadvantage. Allocate cash over time. Investors who desire to take profits, but who are wary of markets that already have seen substantial price gains, could plan to patiently reallocate cash at regular intervals over the course of the year. This approach could be especially useful for equities, where we expect uptrends, but more historically typical market volatility. Such a plan potentially could adopt our rebalancing recommendations at prices that eventually are below current levels. So-called dollarcost averaging, over time, also can be used to increase portfolio exposure to international developed and emerging markets in portfolios where these allocations have been persistently below our target recommendations. Although dollar-cost averaging can be a helpful tool in lowering risk, investors who engage in this investing strategy may forfeit higher returns they may have received had they invested all at once Wells Fargo Investment Institute. All rights reserved. Page 3 of 9

4 EQUITIES Sean Lynch, CFA Co-Head of Global Equity Strategy U.S. Small Cap Equities U.S. Large Cap Equities U.S. Mid Cap Equities Developed Market Ex-U.S. Equities Avoid chasing yield in equities today Last year (and to date in 2018), U.S. equity-market laggards have been the traditionally higher-yielding sectors: Utilities and Telecom Services. 1 We encourage investors to resist overexposure to these sectors, despite the high dividend yields that may be available. The Utilities and Telecom Services sectors sometimes are referred to as bond surrogates. Price movements in these sectors are greatly influenced by changes in 10- year Treasury yields; hence, they often act more like bonds than stocks. The chart below plots the 10 year U.S. Treasury yield against the price of the S&P 500 Utilities Index. The inverse relationship between these two groups is easy to see. The Utilities sector hit a peak when the 10-year Treasury yield bottomed in the summer of Since then, Utilities have traded sideways while Treasury yields have risen. Rising Treasury yields may continue to prove problematic for the group, even after the recent underperformance. When investors chase yield, they often ignore a stock s fundamentals or ability to grow dividends. In our opinion, now could be a bad time to chase yield. Instead, we recommend that investors look toward areas that are better positioned for the renewed economic growth that we expect in 2018 and sectors that may benefit from tax reform. The same sectors also may be in a better position to grow dividends. For this reason, Wells Fargo Investment Institute (WFII) continues to overweight the Consumer Discretionary, Financials, Health Care, and Industrials sectors. This has been a fairly consistent view for WFII, and we believe that now is not a time to change this procyclical stance.» We caution investors to resist the urge to chase yield in the higher-yielding U.S. equity sectors.» The Utilities sector hit a peak when the 10-year Treasury yield bottomed in Since then, Utilities have traded sideways while Treasury yields have risen. Rising Treasury yields may continue to prove problematic for the group. S&P 500 Utilities Index versus 10-year Treasury yield Emerging Market Equities Source: Bloomberg, January 23, Utility sector performance in the chart is reflected by the S&P 500 Utilities Index. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. 1 S&P classifies Real Estate as a sector of the S&P 500 Index. Wells Fargo Investment Institute classifies public real estate investment trusts (REITs) as part of the Real Assets group Wells Fargo Investment Institute. All rights reserved. Page 4 of 9

5 FIXED INCOME Brian Rehling, CFA Co-Head of Global Fixed Income Strategy Underweight High Yield Taxable Fixed Income Underweight Developed Market Ex.-U.S. Fixed Income U.S. Short Term Taxable Fixed Income U.S. Long Term Taxable Fixed Income Emerging Market Fixed Income U.S. Taxable Investment Grade Fixed Income U.S. Intermediate Term Taxable Fixed Income Preferred stock yields Many investors look to high-yield bonds when the goal is to increase a portfolio s income-earning potential. We recommend an underweight allocation to the high-yield debt class, as valuations have become quite expensive. An underweight high-yield allocation can present some income-oriented investors with a tough choice keep a full allocation to high yield and face meaningful downside risk or reduce high-yield holdings and give up needed income. For investors struggling to support their portfolio income needs, we suggest considering preferred securities. A compelling choice but not cheap or without risk Even though preferred-security yields have declined in recent years, yields near 5.0% remain available for purchase and inclusion in a well-diversified portfolio of preferred securities. Many investors are concerned that preferred securities are very interestrate-sensitive, given their potential to remain outstanding for a very long (or indefinite) period of time. Interestingly, historically significant interest-rate movements do not appear to have an outsized impact on preferred securities. Instead, credit and illiquidity events have had a more powerfully negative price impact on preferred securities. These risks often materialize with little warning, and it is important for investors to understand them. Positioning preferred securities in a portfolio There are a number of features that investors may embrace when adding potentially higher-yielding securities to their portfolio. These can include longer maturities, lower credit quality, less liquidity, and a loss of structural protections. Preferred securities contain most, if not all, of these qualities. We recommend that investors who do not have a deep understanding of the many nuances in the preferred market utilize a professional manager to oversee their preferred allocations. Managers have the resources to monitor changing market and regulatory conditions to better optimize a preferred portfolio. In addition, manager access to the $1,000 preferred market offers significant additional pockets of liquidity and additional structures to help optimize value. In the current environment, we favor higher coupon securities and fixed-to-floating structures within the preferred sector. Given the sector s historically higher volatility, we recommend that preferred-security exposure be diversified among a variety of issuers, sectors and structures. As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Keep in mind, dividend yields cannot guarantee a rate of return on an investment.» Given the higher volatility of the preferred sector, we recommend that exposure to this sector be diversified among a variety of issuers, sectors and structures. We strongly recommend that investors consider a professional manager to oversee their preferred allocations.» As the credit cycle continues to mature, the potential for a credit-based correction in the preferred sector will increase.» We currently recommend that investors hold a neutral weighting on the preferredsecurity sector Wells Fargo Investment Institute. All rights reserved. Page 5 of 9

6 REAL ASSETS John LaForge Head of Real Asset Strategy Underweight Commodities Private Real Estate Overweight Public Real Estate Is gold about to break above $1,400? Be kind, for everyone you meet is fighting a hard battle. --Ian Maclaren 2018 has certainly started out with a bang. Higher stock-market prices get most of the attention, but there are plenty of other assets making waves. In the commodity space, natural-gas prices have risen nearly 20 percent, thanks to a colder-than-expected winter. The U.S. continues to produce record amounts of natural gas, though, so we suspect that natural-gas prices will begin to fade as we exit the winter months. Oil prices also have had a great start to the year. West Texas Intermediate (WTI) crude oil has risen by more than 8%, and Brent oil prices have surged nearly 5%. Prices have been buoyed by tighter oil inventories, plus the difficulties in adding more rigs to produce oil in the face of such cold weather. The rise to the mid-$60s for WTI, however, should bring more oil production in the coming months, which we believe will result in lower prices. While energy commodities are getting all of the attention, gold has turned in a sneaky 4% rally to start At $1,353 last week, gold has been pressing the upper limits of its 2014 highs, which was close to $1,382. We believe that this year s gold rally is due to continued U.S.-dollar weakness. The dollar now sits near levels not seen since The chart below shows that gold (gold line) and the U.S. dollar (blue line) often run in opposite directions from one another. Gold could break above its 2014 high, around $1,382, or possibly even above $1,400, but we re skeptical that such a level would hold. To keep moving higher, gold likely will need additional U.S. dollar weakness, which we re not expecting.» Gold is closing in on its 2014 highs, thanks to a very weak U.S. dollar.» For gold to break above $1,400 (and remain above that level), the U.S. dollar needs additional weakness, which we re not expecting. Gold versus U.S. dollar U.S. dollar index value U.S. dollar Gold spot price Gold (U.S. dollar per ounce) Three-year rolling correlation of monthly returns Average Correlation Sources: Bloomberg, Wells Fargo Investment Institute. Monthly Data: January 31, December 31, /2017. Top panel shown in log scale Wells Fargo Investment Institute. All rights reserved. Page 6 of 9

7 ALTERNATIVE INVESTMENTS Justin Lenarcic Global Alternative Investment Strategist Private Equity Hedge Funds-Macro Hedge Funds-Event Driven Overweight Hedge Funds-Relative Value Overweight Hedge Funds-Equity Hedge Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not suitable for all investors and are only open to accredited or qualified investors within the meaning of U.S. securities laws. Finding value with Distressed Debt investing There is a strong argument that Distressed Debt investing is the truest form of value investing among the various hedge fund strategies. The value comes from being able to purchase debt securities, normally senior and subordinated debt, from good (yet challenged) companies. In many cases, institutional investors, such as mutual funds, insurance companies, and pensions, are forced to sell these securities as credit ratings deteriorate. This dynamic allows hedge funds to accumulate enough debt ownership that they can influence, or control, the restructuring process and seek to generate a compelling return as the company stabilizes and its debt and equity (hopefully) trades higher. As shown in the chart below, there is a clear linkage in the rolling two-year return of the HFRI Event Driven: Distressed Restructuring Index and that of the Russell 1000 Value Index. Over multiple market cycles, the performance of the two indices is nearly identical. Yet, the Event Driven: Distressed Restructuring Index historically has had significantly lower volatility. The cyclicality of both indices is evident as well. Recessionary periods historically have been quite difficult for value and distressed debt investing, while the recovery and expansion phases of the business cycle have delivered strong return on investment in the past. Importantly, there are only two periods in the history of the HFRI Event Driven: Distressed Restructuring Index in which the rolling two-year return was negative. One was in the throes of the financial crisis, and the other was in 2015 and 2016, when energy markets collapsed. In other words, the notion of timing the default cycle isn t necessary when investing with Distressed Debt managers, as there are always opportunities to find value in good companies being mismanaged.» Value investors seeking a similar hedge fund strategy with historically lower volatility should consider the Event Driven: Distressed Debt strategy.» Though recessionary periods can be challenging, investors should not base an allocation to Distressed Debt solely on an increase in defaults, as opportunities exist throughout the cycle. Distressed debt investing is value investing but with (historically) lower volatility Rolling 24-Month Index Performance 100% 80% 60% 40% 20% 0% -20% -40% -60% Recession -80% Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Russell 1000 Value Index (Rolling 24-Month Return) HFRI Event Driven: Distressed Restructuring Index (Rolling 24-Month Return) Sources: Hedge Fund Research, Inc. (HFRI), Bloomberg, January 24, Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. Index returns are for illustrative purposes only; reflect general market results; and do not reflect actual portfolio returns or the experience of any investor. Unlike most asset class indices, HFR index returns reflect fees and expenses Wells Fargo Investment Institute. All rights reserved. Page 7 of 9

8 A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider their ability to continue purchases through periods of low price levels. Risks Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Preferreds securities have special risks associated with investing. Preferred securities are subject to interest rate and credit risks. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer's capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing. Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund. Investing in distressed companies is speculative and involves a high degree of risk. Because of their distressed situation, these securities may be illiquid, have low trading volumes, and be subject to substantial interest rate and credit risks. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio's vulnerability to any single economic, political or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars; increasing household debt levels that could limit consumer appetite for discretionary purchases; declining consumer acceptance of new product introductions; and geopolitical uncertainty that could impact consumer sentiment. Investing in financial services companies will subject a portfolio to adverse economic or regulatory occurrences affecting the sector. Some of the risks associated with investment in the health care sector include competition on branded products, sales erosion due to cheaper alternatives, research & development risk, government regulations and government approval of products anticipated to enter the market. Definitions HFRI ED: Distressed/Restructuring Index. Strategies focus on corporate fixed-income instruments, primarily corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceedings or financial-market perception of near-term proceedings. Managers are typically actively involved with the management of these companies; they are frequently involved on creditors committees in negotiating the exchange of securities for alternative obligations, either swaps of debt, equity or hybrid securities. Managers employ fundamental credit processes focused on valuation and asset coverage of securities of distressed firms; in most cases portfolio exposures are concentrated in instruments that are publicly traded, in some cases actively and in others under reduced liquidity but in general for which a reasonable public market exists. Strategies employ primarily debt (greater than 60 percent) but also may maintain related equity exposure. Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values Wells Fargo Investment Institute. All rights reserved. Page 8 of 9

9 S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies. The S&P 500 Utilities Sector Index comprises those companies included in the S&P 500 that are classified as members of the GICS utilities sector. An index is unmanaged and not available for direct investment. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 9 of 9