The Observer


6 Themes That Matter For Long-Term Investors

by Jim McDonald and Daniel Phillips, Northern Trust Asset Management

Put simply, our investment themes can be boiled down to a few words about the global economy and long-term returns across most asset classes — good but not great.
— Jim McDonald, Northern Trust Chief Investment Strategist

Tepid global growth and elevated valuations, following a year of strong stock returns, have some investors worried about recession and the end of the nine-year equity bull market. We don’t think the chances are high that either will happen. Here are six themes that should provide the foundation for portfolios over the next five years.

#1 Mild Growth Myopia
Many investors are overly focusing on how slow this expansion has been, but we think subdued economic cycles and stronger financial systems should push out the next recession and limit its severity.

What this means for investors: We see plenty of gas (not high octane) left in this bull market. If we grow the next five years at the rate of what we’ve been doing, we will still fall short of the expansions of the 80s and 90s (Exhibit 1). We think there will be an extended expansion, a good environment for stocks and high yield bonds.

#2 Stuckflation
Inflation levels remain persistently low in the world’s largest economies (e.g. U.S., Europe, Japan).

What this means for investors: Low and durable structural inflation has altered both monetary policymaking and investor behaviors, keeping yields low (Exhibit 2). The structural forces that have kept inflation low — including demographically hobbled demand and technology-enabled supply — are not going away. Investors will have to keep looking for creative ways to increase yield in their bond portfolios. High yield bonds should help.

#3 Pass/Fail Monetarism
Central banks are in unchartered territory. Without a template for policy normalization, their efforts cannot be graded — but they must not fail.

What this means for investors: If structural inflationary pressures don’t materialize — as we expect — further yield curve flattening will force the Federal Reserve to lower its rate hike trajectory. We think the current Fed rate cycle will end earlier and at a lower level than is priced in the market. Don’t expect a significant rise in global short-term rates. Investors should prepare their portfolios for slow and steady expansion, not for a recession.

#4 Technology Slowzone
Data has become an economic and political force, finding a new level of both scrutiny and appreciation from politicians around the world. While politicians feel their way to right-sized regulations in the new digital age, it will take time to navigate the Technology Slowzone.

What this means for investors: Prepare for technology to cause some volatility, but it should recover. We think investors can count on technology to be an economic growth driver. Politicians should reach solutions allowing tech advancements and data collection to continue as the benefits are too large to ignore.

#5 Global (Re)Positioning System
Politicians also are reshaping global institutions that have existed since World War II. We don’t think the trend of global trade will stop, though it may reshape into more bilateral trade agreements.

What this means for investors: Investors should be patient through some of the volatility these changes may cause. We don’t think this will put a halt to global expansion in trade (Exhibit 3).

#6 Executive Power Drive
Mainstream, rules-compliant politicians are in retreat everywhere as tech-enabled populists push strong leaders and new agendas onto the political stage.

What this means for investors: Investors are accepting leaders who challenge political norms in order to favorably tilt the economic landscape.  It’s clear that “populism” as a broad construct doesn’t have to be, nor has it been thus far, negative for financial markets. Investors will likely stay supportive as populism runs its course.

A Solid Portfolio Foundation
All in all, our forecasts indicate the global economy will grow 2.5% annualized over the next five years, with developed market equities gaining 6% and global investment-grade bonds returning 2.7%. While at first glance such modest growth is low by historical standards, it is acceptable in a world of Stuckflation — and certainly good enough to provide a stable foundation for a diversified portfolio.

For more insights on our themes and to download our full set of asset-class forecasts, see


 Jim McDonald
 Chief Investment Strategist
 Northern Trust


Jim McDonald is an Executive Vice President and the Chief Investment Strategist for Northern Trust. In addition, he chairs the Northern Trust Tactical Asset Allocation Committee, is a member of the Investment Policy and Private Equity Investment Committees, and is trustee of the Northern Trust Alpha Strategies and Equity Long/Short Strategies Hedge Funds.
Prior to joining Northern Trust in 2001 as the Director of Equity Research, Jim was Director of Equity Research at ABN AMRO in New York and Chicago (1994-2000) and Equity Research Analyst at ABN AMRO following the Environmental Services Industry (1990-1994). He started his professional career in 1981 with Arthur Andersen & Co. in Detroit.
McDonald received a BBA from the University of Michigan and an MBA degree with high distinction from Babson College. He is a member of the CFA® Society of Chicago and a registered CPA in the State of Michigan.

 Daniel J. Phillips, CFA

 Director of Asset Allocation Strategy
 Northern Trust Asset Management


Daniel J. Phillips, CFA, is Director of Asset Allocation Strategy at Northern Trust. He is also an Investment Policy Committee Member and Portfolio Manager for Northern Trust multi-asset class products and strategies, including the Global Tactical Asset Allocation Fund.
As Director of Asset Allocation Strategy, Daniel is responsible for overseeing the firm’s asset allocation process and communicating the firm’s opinions to our clients. These responsibilities include participation on the Capital Market Assumptions Working Group that produces Northern Trust’s Five Year Capital Market Outlook. Published annually, the whitepaper provides our long-term forecast for economic activity and financial market returns for asset classes and economies across the globe.
Mr. Phillips received his BBA degree in finance and economics from the University of Iowa and his MBA degree in finance, economics, and international business from the University of Chicago. He is an active CFA® charterholder.

IMPORTANT INFORMATION. This material is provided for informational purposes only. Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice.
All material has been obtained from sources believed to be reliable, but the accuracy, completeness and interpretation cannot be guaranteed. The opinions expressed herein are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing in this material only and is subject to change without notice.
Excerpts reprinted with permission from Northern Trust Asset Management. Read the full article and important disclosures at:
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