WFII Q4 Consumers, Commodities, and Currencies · COMMODITIES. Fluctuations in . commodity prices impact stock market performance and consumer behavior. CURRENCIES. Currency exchange

Seeing Opportunities Through a Multifaceted Lens

Capital markets are largely impacted by consumer activity, commodity prices, and currency-rate fluctuations. The interactions between these three forces influence economic growth and asset valuations. Investors are wise to pay attention to how these fundamental drivers affect portfolio performance.

Drivers of Economic and Market Performance

CONSUMERSConsumer activity

supports global economic growth.

COMMODITIESFluctuations in

commodity prices impact stock market

performance and consumer behavior.

CURRENCIESCurrency exchange rates

are an important component of investment decisions and consumer behavior.

Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

3Wells Fargo Investment Institute Consumers, Commodities, and Currencies

Conditions Are Favorable for GrowthToday, commodity prices are low, the dollar is strong, and consumer confidence is relatively high. A stronger U.S. dollar has helped support the slow-and-steady domestic growth rate in a late-recovery environment, yet it is negatively impacting oil-producing economies, many of which are emerging markets. Meanwhile, consumer sentiment tends to fluctuate and may trigger corresponding market swings and impact supply-demand dynamics. This, in turn, has repercussions on developed markets whose economies are largely driven by consumer activity.

Highlights We expect commodities to remain in a bear-market cycle, the dollar to continue fluctuating, and consumer confidence to continue improving.

Overall, we favor countries such as India and Taiwan that benefit from upbeat consumer activity and confidence, lower commodity prices, and favorable currency-exchange rates.

We suggest focusing on consumer activity to identify potential growth prospects over the next few years.

Recognizing how commodity prices historically have behaved in bear markets— and how currency fluctuations affect asset performance—can help investors spot potential opportunities over the next five to 10 years.

What Effects Do These Factors Have On Business?

60%of senior executives at U.S. companies say that volatility in commodity prices

is affecting their business

63%say currency exchange rates play a major role in their international

business decisionsSource: Wells Fargo International Business Indicator,

a survey of senior executives at U.S. companies that conduct business internationally and have

$50 million or more in revenue. April 2016.

QUESTIONS WE ADDRESS

How do commodity prices and currency exchange rates affect consumer activity?

How are commodities and capital markets related?

What is the link between currencies and financial markets?

What strategies should investors consider in the current environment?


COMMODITIES

How Commodity Markets Behave

Commodity Prices Tend to Move TogetherCommodity prices, historically, tend to trade as a family. The media often discuss individual commodity prices as if they are different. As the thought goes, oil is not used like gold, and gold is not consumed like corn. This may make sense week-to-week or month-by-month, but over long periods of time, commodity prices have historically tended to move together.

Strong Relationship Between Commodity Prices Covers CenturiesChanges in Cost for Food, Energy, and Commodity Composites Back to 1800

The long-term connection between most “individual” commodities—the average individual commodity index (blue line) vs. the food commodity composite (green line) and the energy commodity composite (purple line)—is indisputable. This chart shows the performance of these groups on a rolling 10-year basis.

Source: Ned Davis Research (NDR), 10/19/16. Yearly data, 12/31/1800-01/01/2015.An index is unmanaged and unavailable for direct investment.Past performance is no guarantee of future results.

1800 ’10 ’20 ’30 ’40 ’50 ’60 ’70 ’80 ’90 1900 ’10 ’20 ’30 ’40 ’50 ’60 ’70 ’80 ’90 2000 ’10 ’15

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Average at Commodity Peaks = 8.14%

24

18

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■ NDR Commodity Composite■ NDR Food Commodity Composite■ NDR Energy Commodity Composite


Commodity Bear Cycles Tend to Last Longer Than Bull CyclesWe call tandem price movements over extended time periods “super-cycles.” Commodity bear markets have lasted longer than bull markets. The average commodity bull super-cycle has lasted 16 years; the average commodity bear super-cycle has lasted nearly 20 years, based on data dating back to 1800.In addition, commodity bull markets almost invariably have ended with a momentous move higher, followed by a thundering crash. We just witnessed one of these crashes between 2011 and 2016.

Commodities Have Tended to Zig When Stocks ZagDow Jones Industrial Average and NDR Commodity Composite

Source: Ned Davis Research (NDR), 10/19/16. Monthly data, 12/31/1897-9/30/2016 (log scale).An index is unmanaged and unavailable for direct investment.Past performance is no guarantee of future results.

’10 ’20 ’30 ’40 ’50 ’60 ’70 ’80 ’90 ’00 ’10

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10

10,000

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20

40

80■ NDR Commodity Composite■ Shaded Areas Represent Secular Commodity Bear Markets

■ Dow Jones Industrial Average■ Shaded Areas Represent Secular Equity Bear Markets

’00

Commodity Prices Tend to Move Opposite of Stock PricesThe chart above shows that historically, commodity super-cycles do not necessarily move in the same cycles as stocks; in fact, they often have not. While U.S. equity markets traditionally have moved in the opposite direction of commodity markets, that’s not always the case with global markets. The reason is that many of the world’s largest commodity producers are often countries themselves. When commodity prices sink, the economies and stock markets of these heavy commodity-producing countries typically decline as well.


The Fed Has Changed Commodity Super-cycles

Source: Ned Davis Research, 10/19/16. Monthly data, 12/31/1800-01/01/2016.An index is unmanaged and unavailable for direct investment.Past performance is no guarantee of future results.

10

20

50

100

200■ NDR Commodity Composite■ Shaded Areas Represent Secular Commodity Bear Markets

Log

Scal

e

’12 ’24 ’36 ’48 ’60 ’72 ’84 ’96 1908 ’20 ’32 ’44 ’56 ’68 ’80 ’92 2004 ’161800

1913 Fed Established

What’s Different About Recent Super-cycles?The advent of the Federal Reserve (Fed) in 1913, with its ability to create liquidity, changed the structure of commodity super-cycles. Three specific changes occurred:Inflated prices: Notice the higher highs have been followed by higher lows in the cycles since 1913 in the chart above. Prior to 1913, credit was largely created by gold. As more gold was discovered globally, credit markets expanded. When new gold finds were depleted, credit markets tightened, pressuring commodity bulls into becoming commodity bears. Because gold supplies are limited, credit levels and commodity prices have remained range-bound over the long term.Shorter super-cycles: Before the Fed was established, super-cycles were significantly longer. The average commodity bear super-cycle in the 1800s was nearly 30 years long. The average length since that time has been reduced to less than 20 years.Price damage is done early: In the last two bear super-cycles (starting in 1951 and 1980), most of the price damage occurred within the first five years.


KEY TAKEAWAYS Strategic allocation to commodities is important. Commodities tend to behave differently from other asset classes.

Five years into the commodity bear super-cycle, the worst of falling prices is likely over. While the average bear super-cycle lasts nearly 20 years, we doubt that this cycle lasts that long.

From here, we expect commodity prices to fluctuate modestly for a number of years. Some tactical opportunities should arise, however, in individual commodities.

Falling commodity prices tend to hurt the stock markets of large commodity-producing countries and tend to boost markets of the large commodity consuming countries. When a country is both the largest producer and the largest consumer, there is a redistribution of wealth to producers when prices rise and to consumers when prices fall.

How Should Investors Consider Commodities Today?We are five years into a commodity bear super-cycle. Today, the worst of the price damage appears to be over. The average commodity price is down 38 percent from the 2011 peak, and the price losses at the worst point of this cycle (-44 percent) have surpassed the 1951 and 1980 bear markets. Looking ahead, we expect limited downside. Yet we also do not expect prices to rise quickly. Years of sideways price action, with a slight bias to the upside, will likely be the course from this point.

Commodity Prices Help Explain Currency Movements; Not the Other Way AroundThis finding is consistent with academic research attempting to identify a link between the dollar and commodity prices. When U.S. businesses and consumers continue to purchase oil and metals that are rising in price, the U.S. typically runs a bigger trade gap with the rest of the world. This leads to higher inflation as additional borrowing weighs on the U.S. dollar. Since the 1970s, the U.S. foreign debt for oil imports undercut the dollar’s value, especially in periods of rising oil prices.

Sources: U.S. Energy Information Administration, United States Department of Agriculture, United States Geological Survey, World Steel Association. 10/31/2016

LARGEST PRODUCER LARGEST CONSUMER

Crude Oil Russia United States

Wheat China China

Soybeans United States China

Copper Chile China

Coffee Brazil United States

Beef United States United States

Low Commodity Prices—Who Gains and Who Loses?Falling prices tend to benefit consumer countries at the expense of producing countries.


CURRENCIES

How Exchange Rates Can Affect Your Portfolio

Currency exchange rates are an important component of investment decisions. U.S. investors are accustomed to transactions in U.S. dollars. Yet, it could prove costly to ignore the potential effects of foreign-currency movements on your portfolio, even if you do not invest outside of the U.S.

What Impacts Exchange Rates?Currency-exchange rates tend to reflect the relative health of one economy vs. another. Investors should consider multiple factors, just as a physician relies on a checklist to diagnose a patient’s health.

INCREASE DOLLAR’S VALUE DECREASE DOLLAR’S VALUE

Economic Growth Rate Rising Falling

Inflation Proximity to 2%* Around 2% Much above/below 2%

Interest Rates Rising Steady or falling

Confidence in Political Leadership Rising Falling

Source: Wells Fargo Investment Institute, 10/14/16* Most central banks target some measure of consumer price inflation close to 2 percent. The Federal Reserve uses an informal target of 2 percent on personal consumption expenditures, less food and energy.

Dollar’s Exchange Value Can Affect Investment ReturnsCurrency-exchange-rate movements are important for dollar-based investors, particularly if their portfolios hold securities denominated in foreign currencies. The table below illustrates the direct currency effect on investments held in foreign currencies. The return is enhanced if the dollar depreciates but shrinks if the dollar appreciates.

Dollar Appreciation Hurts Returns; Depreciation Benefits Returns

GAIN IN PRICE + DIVIDEND - DOLLAR APPRECIATION = RETURN

EQUITY (CURRENCY) PRICE GAIN OR LOSS DIVIDEND CHANGE IN DOLLAR’S VALUE* TOTAL RETURN

English ABC Co. (British pounds) 2% 1% 5%

(dollar appreciation) -2%

Japanese XYZ Co. (Japanese yen) 2% 1% -4%

(dollar depreciation) 7%

U.S. 123 Co. (U.S. dollars) 2% 1% 0%

(investment in dollars) 3%

Source: Wells Fargo Investment Institute, 10/14/16* Positive values indicate that the dollar is appreciating, negative values denote depreciation. The investor’s home currency is U.S. dollars, and the investment period is one year. Company names and amounts are hypothetical and intended for illustrative purposes only and do not represent the performance of any investment.


Exchange Rates’ Effect on Multinational CompaniesInvesting in a U.S. company offers no potential for direct currency contribution, yet there is an indirect effect. U.S. multinationals typically convert a portion of their overseas earnings back into dollars. If the dollar is appreciating against another currency, the company must sell a cheaper currency to buy a more expensive one, resulting in fewer dollars. Conversely, dollar depreciation means the company buys a cheaper dollar by selling a foreign currency that has gained in value. As long as a portion of a U.S. investor’s assets is invested overseas—directly or indirectly—dollar appreciation raises the cost of converting the capital back into dollars, and vice versa.

Dollar’s Loss in ValueIn a recently published triennial survey of foreign-exchange turnover, the Bank for International Settlements reported that the U.S. dollar was still used for 88 percent of worldwide trades in April 2016—essentially unchanged since 1987. Yet, the dollar’s primacy in international transactions has not prevented a gradual depreciation for the currency over decades. We view this trend as benign—a result of globalization and more effective management of the dollar’s value.

The Dollar’s Exchange Value Has Trended LowerThe chart shows that the dollar can have periods of sharp appreciation when a “strong dollar” works against dollar-based investment returns. Still, the dollar’s historical and steady long-term depreciation trend seems to signal not so much a deterioration in the U.S. economy but rather economies “catching up” to the U.S. Our outlook for this trend to continue should supplement international investment returns.

Sources: Organization for Economic Cooperation and Development, 10/19/16. Monthly data, 01/31/1973-09/30/2016.An index is unmanaged and unavailable for direct investment.Past performance is no guarantee of future results.

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=100

150

120

90

60

■ U.S. Dollar Composite Index Against Major Currencies

KEY TAKEAWAYS Hold a diversified international allocation to stocks and bonds to track overseas economies as the U.S. dollar depreciates over the long term.

A stable U.S. dollar should favor an underweight position in developed-market bonds. In today’s market, we do not recommend hedging fixed-income assets nor do we suggest hedging equity assets.

We favor the U.S. dollar vs. most emerging-market local currencies, supporting our underweight of emerging-market equities and our preference for dollar-denominated emerging-market debt.


CONSUMERS

Connecting Back to the Consumer

Consumer spending is key to U.S. economic growth. Whether consumers realize it or not, commodity prices and the strength of the U.S. dollar both have a direct influence on consumer activity (or consumption).

Currency Markets Influence the Prices We PayWhen the dollar appreciates, the prices of imports to the U.S. often become cheaper. Likewise, a weaker dollar may boost the cost of imported goods. Considering the U.S.’s significant participation in global trade, some exporters to the U.S. have been reluctant to change their prices when exchange rates have varied in recent years. They aim to avoid fluctuating market share. This has helped to keep inflation very low in the U.S. for a number of years.

U.S. Share of Global Imports Has IncreasedU.S. consumers’ share of global trade has increased over the past 35 years—from food to clothing to automobiles and the raw materials that U.S. factories turn into products.

GLOBAL IMPORTS U.S. IMPORTS U.S. SHARE

1980 $2.761 trillion $0.291 trillion 12.4%

2015 $20.653 trillion $2.348 trillion 13.3%

Sources: Wells Fargo Investment Institute, U.S. Census Bureau, “U.S. Trade in Goods and Services – Balance of Payments Basis,” June 3, 2016, and The World Bank, imports of goods and services, current U.S. dollars, October 14, 2016.

Lower Commodity Prices Spur Consumer Discretionary SpendingMany investors question whether falling oil prices influence the U.S. consumer. We believe they do, but with two caveats to that view:

First, the impact of food and energy prices on the U.S. consumer has been fading for decades. In 1960, the average American spent 17.5 percent of his or her disposable income on food. Today, it’s 9.6 percent. Likewise, the average American spent nearly 8 percent of his or her disposable income on energy in 1980, while today that has decreased to 3.6 percent. Globally, however, the story is often very different, especially for low-income consumers in emerging economies where spending for commodities can consume all of their pay. For example, food alone accounts for nearly half of the expenditures of an average household in Kenya.1

1Source: USDA, Economic Research Service, April 2016.


u Additionally, lower gasoline prices do not impact all American consumers the same. Today, the top income group in the U.S., which makes $177,000 annually on average, spends about 1.5 percent on gasoline. In contrast, those in the lower income group, who have a $28,000 average annual income, spend roughly 9 percent of their income on gasoline—six times more. Because motor fuel tends to rise and fall much more sharply than other commodities (see chart below), it can have an outsized effect on the disposable incomes of lower-income consumers.

When Commodity Prices Rise, U.S. Inflation Tends to IncreaseCommodities are often an underlying cause of inflation, so there does appear to be a long-term connection. In fact, looking back at the commodity bull super-cycles since 1914, U.S. Consumer Price Index (CPI) inflation rates have been 6 percent vs. only 1.4 percent during commodity bear cycles.2

2Source: Ned Davis Research.

Motor Fuel Has Fluctuated More Than Other Commodities

Sources: Bloomberg, U.S. Bureau of Labor Statistics, 11/4/2016, seasonally-adjusted data, 1/1/1995-12/31/2015Past performance is no guarantee of future results.

’96 ’99 ’02 ’05 ’08 ’11 ’14

60%

40%

20%

-20%

0%

-40%

■ U.S. CPI Motor Fuel■ U.S. CPI Urban Consumers Food■ U.S. CPI Household Fuels

Year

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KEY TAKEAWAYS Given lower energy prices and low inflation, we recommend investors overweight the Consumer Discretionary sector.

Changes in commodity prices can impact inflation, but over time, commodities have become a smaller part of the average American’s budget.

As commodity prices have stabilized over the past year, expect inflation to pick up in the second half of 2017; this keeps us underweight long-term bonds, which can be especially sensitive to inflation.


Opportunities in Today’s Environment

Investments That May Benefit From Commodities, Currencies, and Consumer Activity

STOCKSConsumption-driven growth and low inflation rates generally benefit equities over bonds in a well-diversified portfolio. We believe that large-cap U.S. equities will continue to outperform other equity groups over the next few years and currently maintain an overweight to this asset class.

Within U.S. large caps, we favor more cyclical sectors such as Industrials that are sensitive to the ebb and flow of the economy. Consumer Discretionary stocks should also perform well based on our expectations for low oil prices and improvements in the U.S. consumer and housing sectors.

BONDSWhile inflation may pick up in the coming year, yields will likely remain near historically low levels. We have a bias toward investment-grade issues. In today’s environment, we recommend that

investors consider more intermediate maturities given the potential yield pickup. While we believe international fixed-income investors can benefit from timely currency hedging, our current advice is benchmark neutral. Additionally, we are underweight developed-market debt and evenweight emerging-market debt denominated in dollars.

REAL ASSETSWe recommend a broad exposure to commodities that aligns with strategic targets. Investors may hold real assets directly, which is straightforward for gold and silver but more costly for other commodities. Instead,

they may choose to indirectly invest in companies with exposure to commodities. Commodities often move in tandem, yet tactical opportunities within sub-classes may exist. For example, at the present time, we favor platinum over gold. Agricultural commodities remain weak but could see some improvement as foreign demand picks up. Real estate may offer opportunities for investors as the consumer rebounds and interest rates remain low.

ALTERNATIVE INVESTMENTSWe remain highly constructive on several prospective Private Capital opportunities and recommend that qualified investors continue to diversify their private capital investments by vintage year. Private Capital strategies within healthcare and goods and services should perform well alongside a strong consumer. Direct Lending strategies provide exposure to the consumer sector as many middle market companies in the Technology sector are securing financing outside of traditional channels. Certain Private Capital strategies are designed to capitalize on opportunities within commodities, particularly in energy infrastructure. Relative Value strategies, specifically those focused on Long/Short Credit, as well as Macro strategies offer broad exposure to commodities. Both Discretionary and Systematic strategies offer opportunities in currencies on a long and/or short basis and globally. We expect more opportunities for Macro managers as currencies and interest-rate differentials diverge.

ConclusionConsumer activity, commodity prices, and currency-rate movements play a predominant role in global market dynamics and investors’ portfolios. Consumers are a fundamental driving force of developed-market economies. Today, the U.S. consumer appears relatively strong, and we expect the trend to persist as the recovery continues. Overseas, consumers are also regaining their footing after years of healing from the recession. However, in many developed economies, including the U.S., there are challenges to consumer confidence from political and economic uncertainties.

Commodities as an asset class comprise several different types. Each of these sub-asset classes has distinctive characteristics, helping to enhance the benefits of a well-diversified portfolio. In addition to the diversification benefits that commodities offer investors, we also see potential opportunities within today’s bear market, particularly through an actively managed strategy. With our forecast for oil prices to remain well below recent highs, we believe this bodes well for consumer activity and the global economy.

Beyond commodities, currency exchange rates are an essential component to sound decision-making for investors because they impact asset-class returns. Currencies also affect consumer prices and trade volumes. Understanding how currencies impact the prices of goods, services, and assets is crucial for both investors and consumers as the global economy becomes increasingly connected.

For now, we see long-term growth prospects for commodity-producing emerging markets, yet take a more cautious approach in the near term, as many of these countries rebalance their economies. Looking ahead, with returns for many asset classes expected to remain below average for the next few years, we recommend holding a well-diversified portfolio, while exploiting tactical opportunities based on market conditions that include changes to commodities, currencies, and consumers.


About the AuthorsPaul Christopher, CFAHead Global Market Strategist

Mr. Christopher focuses on the global investment environment and offers investment advice on currencies. Prior to joining Wells Fargo, he developed economic strategies to trade in global financial and commodity futures markets for Eclipse Capital Management. In previous positions, Mr. Christopher supplied international economic perspectives for Wells Fargo predecessor A.G. Edwards, and advised institutional clients of Istanbul-based Global Securities on the oil-based economies of the Caucasus and Central Asia.

Mr. Christopher received a Bachelor of Arts in Economics and Spanish from Saint Louis University, a Master of Arts in Economics from the University of Rochester, and is a CFA charterholder. He is based in St. Louis.

John LaForgeHead of Real Asset Strategy

Mr. LaForge is part of the leadership team that develops strategic and tactical asset allocation recommendations and market commentary for real assets, which includes real estate investment trusts (REITs) and master limited partnerships (MLPs) as well as global equities. Prior to joining Wells Fargo Investment Institute, Mr. LaForge spent seven years at Ned Davis Research as chief commodity strategist. Prior to that, he managed $1.2 billion across seven mutual/hedge funds under multiple client platforms for Phoenix Investment Partners.

Mr. LaForge earned a Bachelor of Science in Finance and Master of Business Administration from the University of Tampa. He is based in Sarasota, Florida.

Justin LenarcicGlobal Alternative Investments Strategist

Mr. Lenarcic researches alternative strategies, including developing strategy convictions, sourcing, constructing recommended portfolios, and publishing alternative investment commentary. Prior to joining Wells Fargo in 2007, he worked as a quantitative equity analyst for an investment management firm. He has more than 11 years of experience in financial services.

Mr. Lenarcic earned a Bachelor of Arts in History from the University of North Carolina at Chapel Hill. He is a Chartered Alternative Investment Analyst (CAIA®) designee and is located in Charlotte, North Carolina.

Tracie McMillion, CFAHead of Global Asset Allocation Strategy

Ms. McMillion leads the development of global investment strategy. She oversees the creation of asset allocation recommendations and writes economic and market commentary and analysis. Prior to her current role, she served as an asset allocation strategist and a senior investment research analyst for Wells Fargo and predecessor firms.

Ms. McMillion earned a Bachelor of Arts in Economics and a Master of Business Administration from the College of William and Mary in Virginia. She is a CFA charterholder. Ms. McMillion is located in Winston-Salem, North Carolina.

Austin Pickle, CFAReal Asset Analyst

Mr. Pickle is a research analyst for the global real assets strategy team. The team develops strategic and tactical asset allocation recommendations and market commentary for real assets, which includes real estate investment trusts (REITs), master limited partnerships (MLPs), and commodities. Prior to joining Wells Fargo Investment Institute, Mr. Pickle held a variety of roles over eight years with Fidelity Investments, most recently as a fixed-income specialist helping high net worth clients construct bond portfolios.

Mr. Pickle earned a Bachelor of Arts in Business Administration and a Master of Arts in International Business from the University of Florida in Gainesville, FL. He is also a CFA Charterholder. He is located in Sarasota, Florida.

Michael Taylor, CFAGlobal Research Analyst

Mr. Taylor focuses on global asset allocation strategy and economic and market analysis. He has more than 17 years of experience in financial services and has spent the past 13 years at Wells Fargo.

Mr. Taylor earned a Bachelor of Science in Chemistry from the University of Minnesota Institute of Technology, Bachelor of Arts degrees in Chinese and Russian from the University of Minnesota College of Liberal Arts, and a Master of Business Administration from the University of Minnesota Carlson School of Management. Mr. Taylor is a CFA charterholder. He is based in Minneapolis.


Risk ConsiderationsAlternative investments are not suitable for all investors. Any offer to purchase or sell a specific alternative investment product will be made by the product’s official offering documents. Investors could lose all or a substantial amount investing in these products.

All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors some of which may be unpredictable.

Private Capital funds are complex, speculative investment vehicles and are not suitable for all investors. They are generally open to qualified investors only and carry high costs and substantial risks and may be highly volatile. There is often limited (or even non-existent) liquidity and a lack of transparency regarding the underlying assets. They do not represent a complete investment program. The investment returns may fluctuate and are subject to market volatility so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Private Capital funds are not required to provide investors with periodic pricing or valuation and are not subject to the same regulatory requirements as mutual funds. Investing in Private Capital funds may also involve tax consequences. Speak to your tax advisor before investing. An investment in a Private Capital fund involves the risks inherent in an investment in securities as well as specific risks associated with limited liquidity, the use of leverage, and illiquid investments. There can be no assurances that a manager’s strategy will be successful or that a manager will use these strategies with respect to all or any portion of a portfolio. Please carefully review the Confidential Private Placement Memorandum or other offering documents for complete information regarding terms, including all applicable fees, as well as other factors you should consider before investing.

Other risk associated with the asset classes discussed in this report include:

Commodities: The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or other factors affecting a particular industry or commodity.

Currency: Currency risk is the risk that foreign currencies will decline in value relative to that of the U.S. dollar. Exchange rate risk between the U.S. dollar and foreign currencies may cause the value of a portfolio’s investments to decline.

Fixed Income: Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed-income securities are subject to market risk. All fixed-income investments may be worth less than their original cost upon redemption or maturity.

Emerging Markets: Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Real Estate: Investing in real estate investment trusts (REITs) has special risks, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Stocks: Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. A portfolio that is concentrated in certain sectors of the economy may subject it to more risks than a portfolio that is broadly diversified over numerous sectors of the economy. This will increase the portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector or the industries within the sector and may result in greater price volatility.

Index DefinitionsAn index is unmanaged and not available for direct investment.

CPI ratio uses a composite Consumer Price Index for the main seven economies (United States, Canada, France, Germany, Britain, Italy, and Japan) in the numerator and the comparable U.S. index in the denominator. Both indices are from the Organization for Economic Cooperation and Development.

Dollar index is the Federal Reserve’s weighted average of U.S. dollar exchange rates against the euro, Japanese yen, British pound, Canadian dollar, Australian dollar, Swedish krona and Swiss franc, weighted by each country’s share in U.S. trade.

Dow Jones Industrial Average is a price-weighted average of 30 of the largest companies traded on the New York Stock Exchange and NASDAQ.

NDR Commodity Composite measures a basket of commodity prices as well as inflation. It blends the prices obtain by George F. Warren and Frank A. Pearson, the purchasing manager index (PPI) and the Thompson Reuter’s Equal Weighted Continuous Commodity Index. George F. Warren and Frank A. Pearson, former academics at Cornell, collected and published commodity price data from 1749 through 1932. The PPI measures the average changes in prices received by domestic producers for their output. The Thompson Reuters Equal Weighted Continuous Commodity Index comprises 17 commodity futures that are continuously rebalanced: cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, live cattle, live hogs, natural gas, orange juice, platinum, silver, soybeans, sugar no. 11, and wheat.

NDR Energy Index is an equal-weighted basket of the energy commodities in the NDR Commodity Composite Index.

NDR Food Index is an equal-weighted basket of the food commodities in the NDR Commodity Composite Index.

U.S. CPI Household Fuels is a component of the Fuels and Utilities Index, which is in the Housing major group of the Consumer Price Index (CPI). The household fuels index measures the price movement of residential energy items used for heating, cooling, lighting, cooking and other appliances, and household equipment. Together with the index for motor fuels, it makes up the special index for Energy.

U.S. CPI Motor Fuel, a component of the Private Transportation Index, is included in the transportation group of the Consumer Price Index (CPI). Together with the index for household fuels, it makes up the Special Energy Index. The Motor Fuel Index is published on a monthly basis for all areas for which CPI data are published.

U.S. CPI Urban Consumers Food represents the Food group in the All Urban Consumers Consumer Price Index (CPI). The All Food Index is published on a monthly basis for all areas for which CPI data are published.

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For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.

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The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general informational 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.

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 you existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities 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.

© 2016 Wells Fargo Clearing Services, LLC. All rights reserved.

1116-03044 [100432-v1] 0000593798 (Rev 00, 1 ea)

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WFII Q4 Consumers, Commodities, and Currencies · COMMODITIES. Fluctuations in . commodity prices impact stock market performance and consumer behavior. CURRENCIES. Currency exchange