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What to expect in 2023 for equities, fixed income, interest rates and real assets – and what that means for our positioning.

Rising interest rates in 2022 disproportionately hurt U.S. equities, with a heavier weight to interest-rate-sensitive growth stocks.

In 2023, we expect:

  • A downside risk to corporate profits, consistent with an economic slowdown or recession.

  • Potential improvement in investor sentiment as central-bank rates may plateau, inflation could moderate and a possible recession may pass quickly.

  • Developed markets to perform better than emerging markets again as China likely will continue to struggle.
Fixed Income

Elevated inflation and interest rate volatility triggered bond losses in 2022, as the Federal Reserve engaged in the fastest set of rate hikes on record.

In 2023, we expect:

  • Stable fundamentals, low default rates and historically high credit quality to support high yield bond returns.

  • Investment grade bonds to benefit from a resilient consumer and some moderation of high interest rate volatility.

  • Investors to find more opportunities in the bond market, with higher income and continued corporate resiliency.

The rising trend of short-term rates that began to crystallize near the end of 2021 gained steam early in 2022 as the Ukraine war reignited inflation pressure.

In 2023, we expect:

  • Fed rate hikes to total 0.50% to 0.75%, to reach a steady policy rate of 5% that likely would be considered sufficiently high for the Fed to pause.

  • Non-U.S. interest rates to hold steady or even decline, as non-U.S. regions face less inflation risk and higher recession risk.

  • Treasury yields to likely move slightly higher but remain stable thereafter as labor market strength supports the economy and makes the Fed hesitant to reverse course.
Real Assets

Natural resources and listed infrastructure brought some stability to the diversified portfolio in 2022, a year where investors struggled to find diversifying asset classes.

In 2023, we expect:

  • Persistent cash flows, tight commodity markets, stronger balance sheets and attractive valuations to support natural resources.

  • Natural resources to play an important role in the portfolio, both as a hedge against inflation and a quicker way to potentially benefit from a surge in emerging markets if China re-opens successfully.

  • Global real estate to post solid gains — after a difficult 2022 — if interest rates stabilize or fall for a sustained period of time.

It was a difficult year for stocks, and in an atypical fashion bonds failed to provide much protection.
Source: Northern Trust Asset Management, Bloomberg. Year-to-date data through November 30, 2022. Five-year annualized data from November 30, 2017 to November 30, 2022. Past performance is no guarantee of future results. EM debt means emerging market debt and TIPS means Treasury Inflation-protected securities. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Indexes used are: cash - Bloomberg (BBG) U.S. Treasury Bills 1-3 Months; municipal bonds - BBG Municipal Bond; investment grade bonds - BBG U.S. Aggregate; TIPS - BBG U.S. Treasury Inflation Notes; high yield bonds - BBG U.S. High Yield 2% Issuer Cap; emerging market debt - J.P. Morgan GBI-EM Global Diversified Composite; U.S. equities - MSCI U.S. IMI; developed ex-U.S. equities - MSCI World Excluding U.S. IMI; emerging market equities - MSCI Emerging Markets IMI; natural resources - S&P Global Natural Resources; global real estate - MSCI ACWI IMI Core RE; global listed infrastructure - S&P Global Infrastructure.
Our asset class assumptions form the basis for our asset allocation framework, which combines long-term, strategic discipline with short-term, tactical flexibility.
6 Key Themes
Our Capital Market Assumptions five-year market outlook provides insight into the forces shaping the investing landscape for the coming years. Here are the six key themes driving our strategic outlook and asset allocation for the next five years.
Slow Growth Transitions
Slow Growth Transitions

Slow transitions will likely lead to continued slow growth.

Slow transitions — pandemic to endemic; globalization to regionalization; and fossil fuels to renewables — mean investors must navigate a challenging global economy with high debt and unfavorable demographics.

We think the past two years’ stimulus-boosted growth will revert to previous slow form.

Source: Northern Trust Asset Management, Bloomberg. Data from 3/31/2017 to 3/31/2022.
Inflation Recalibration
Inflation Recalibration

Just as investors thought pandemic-related inflation would settle down, the war in Ukraine forced them to recalibrate.

Automation and digitization still produce powerful disinflationary forces, but they will likely need time to overcome recent supply shocks.

The Stuckflation regime is over, replaced by a period of recalibration back toward target levels.

Source: Northern Trust Asset Management, Bloomberg. Data from 3/31/2017 to 3/31/2022. All regions use headline Consumer Price Index as the inflation metric.
Monetary Drought
Monetary Drought

The monetary flood has evaporated, and investors must adjust for higher interest rates.

Investors must adjust for higher interest rates in their decision-making and no longer depend on central banks to rescue the economy.

Central bank policy trajectory and the resulting short-term interest rates are taking a more restrictive turn.

Source: Northern Trust Asset Management, Bloomberg. Data as of 6/30/2022.
Regional Rebuilding Blocs
Regional Rebuilding Blocs

Countries are rebuilding their economic and military security by limiting their dependence on imports.

Countries are rebuilding their economic and military security by limiting their dependence on imports such as energy and technology, especially from political adversaries. Investors will decide whether — or how best — to deglobalize their portfolios accordingly.

Geopolitical considerations have moved to the forefront as countries rethink trade dependencies.

Source: Northern Trust Asset Management, OEC, Eurostat. Import data as of most recently available calendar year (2020 for U.S. and China, 2021 for Europe).

A focus on national energy security and high fossil fuel prices creates potential investment opportunities for renewable energy.

Russia’s energy battle with Europe triggered a search for other sources — climate-friendly or not. While this may delay the green transition, the focus on national energy security and high fossil fuel prices creates potential investment opportunities for renewable energy.

Fossil fuels still dominate energy portfolios — but we believe green (and nuclear) sources will continue to grow.

Source: Northern Trust Asset Management, International Energy Agency. Data as of 2019, the most recently available data. Data labels show percent fossil fuels.
Not So Negative
Not So Negative

Higher interest rates bring investors closer to positive real after-inflation cash returns.

Higher interest rates — including a move out of negative territory for Europe and Japan — bring investors closer to positive real after-inflation cash returns. This is good for economic functioning and savers, but a risk for other investment returns.

The central bank shift to tighter policy lowers the expected return premium for risk assets versus cash.

Source: Northern Trust Asset Management, Bloomberg. Year-end data from 2012 through 2021; *Current as of 6/30/2022.
Capital Market Expertise
Every year, Northern Trust’s Capital Market Assumptions Working Group develops forward-looking, historically aware forecasts for global economic activity and financial market returns — which drive our asset class return expectations and inform our asset allocation decisions.
All of this comes together in the form of our long-term strategic asset class allocation suggestions, which are used by institutional and individual investors worldwide.
View our 5-year outlook

Building Smart Portfolios

Our forward-looking, historically aware investment approach powers a breadth of capabilities and solutions — spanning a full spectrum of asset class strategies and investment styles — to meet a variety of portfolio needs.
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Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments, so they can confidently realize their long-term objectives.

Entrusted with $999.1 billion of investor assets as of September 30, 2022, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy.

$885 Billion in A U M1

That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes.

As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect, and transparency.

1Assets under management as of December 31, 2018. For the Northern Trust Asset Management entities included in the A U M total, please see disclosure at end of this page.