2019 Outlook

What to expect in the year ahead

We increased our risk allocation at the start of the New Year — and remain ever-nimble to adjust to changing economic and market conditions. Find out what this means for your portfolio in 2019.
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ASSET CLASS FORECASTS AND RETURN EXPECTATIONS
Slowing global growth in 2018 — coupled with an overzealous Fed and ongoing geopolitical distractions — delivered a low return environment.
Equities

Equity markets remain tied to the Federal Reserve and news on trade.

While the Fed’s job isn’t to make the equity markets happy, its actions and messaging will largely set the tone for 2019.

Our 2019 view

Economic growth is slowing but we do not expect recession.

Emerging markets are acutely exposed to Fed action and trade tiffs.

Fixed Income

Higher interest rates and wider credit spreads throughout 2018 led to flat or slightly negative returns.

High yield has outperformed investment grade debt, which has cushioned against the higher rates.

In 2019 we expect

High yield’s “downside mitigation, upside participation” nature is attractive; fundamentals and technicals remain strong.

A Note About
Interest Rates

The U.S. Treasury yield curve continued to flatten through 2018 — and some parts have actually inverted.

  • Financial markets are telling the Fed to pause.
Real Assets

Real assets underperformed the broader equity market in 2018, thanks to the effects of higher interest rates (real estate and infrastructure) and falling oil prices (natural resources).

Our 2019 view

A more dovish Fed would have positive implications across the real asset spectrum in the year — and years — ahead.

2018: A TOUGH YEAR FOR RISK TAKING
U.S. equities outpaced all other asset classes in a year that saw global economic momentum downshift.
Bonds held up OK, while risk
assets outside the U.S. did not.
2018
5-YEAR
Past perfomance is not indicative of future results.
Source: Northern Trust Investment Strategy, Bloomberg. Returns greater than one year are annualized. 2018 return data through 11/30/2018
2019 Asset Class Outlook
Our asset class assumptions form the basis for our asset allocation framework, which combines long-term, strategic discipline with short-term, tactical flexibility.
NEW

We increased our recommended risk allocations this January.

 
Equities
Real Assets
Fixed Income
Cash
ASSET CLASS
TAA
TAA
Tactical Asset Allocation (Short-Term)
SAA
SAA
Strategic Asset Allocation (Long-Term)
KEY VIEWS
Asset Class
Developed Markets
Neutral
TAA*
39%
SAA*
39%
Key Views
Despite somewhat elevated valuations and slowing economic growth, the lack of inflationary pressures keeps us neutral toward U.S. equities. Valuations in Europe and Japan are more attractive, where continued accommodative monetary policy should provide a floor for slowing growth. Brexit must be settled before we reassert an overweight position.
Asset Class
Emerging Markets
3% Underweight
TAA*
6%
SAA*
9%
Key Views
Our underweight position reflects the disproportionate hit emerging market equities would continue to take should the Fed continue its current rate hike trajectory (our key risk case). The risk of continued tensions between the U.S. and China also weighs on emerging market equity prospects. Should these risks subside, attractive valuations may argue for an increased allocation sometime in 2019.
Asset Class
Global Real Estate/Infrastructure
Neutral
TAA*
4%
SAA*
4%
Key Views
Global real estate and listed infrastructure continue to offer high income and diversified risk exposures. We retain a strategic position as we do not expect interest rates to move much higher, which would negatively impact returns of these cash flow assets (relative to pure equities) over the tactical horizon.
Asset Class
Natural Resources
Neutral
TAA*
5%
SAA*
5%
Key Views
We remained at neutral throughout 2018. In the case of unanticipated inflation, equity-based natural resources serve as solid protection. Inflation is nowhere to be seen over the next year but a strategic allocation helps diversify the portfolio as well as alleviate the effects of geopolitical risk.
Asset Class
High Yield
8% Overweight
TAA*
11%
SAA*
3%
Key Views
High-yield fixed income represents our biggest overweight. The “downside mitigation, upside participation” nature of the asset class is attractive given our expectation for slowing, but positive, economic growth amid geopolitical distractions. Solid fundamentals (including falling default rates) and constructive technicals (given reduced issuance) make high yield attractive over the tactical horizon.
Asset Class
Investment Grade
1% Overweight
TAA*
35%
SAA*
34%
Key Views
Throughout 2018, any time the 10-year Treasury yield moved higher than 3%, we used it as an opportunity to increase our position — moving from a material underweight at the start of the year to a slight overweight. We think interest rates will remain contained and inflation will stay "stuck."
Asset Class
Inflation-Linked
4% Underweight
TAA*
0%
SAA*
4%
Key Views
Our Stuckflation theme underlies our underweight position. Last year’s cyclical uptick in inflation has rolled over, overcome by structural forces found within both supply (technology) and demand (demographics). Where inflation-linked bonds are used, we prefer targeted duration strategies to maximize exposure to inflation expectations and minimize exposure to interest rates.
Asset Class
Cash
2% Underweight
TAA*
0%
SAA*
2%
Key Views
Following three rate hikes in 2018, cash is providing low but measurable returns above inflation. However, given we only expect one more hike over the next year, we see better opportunities further out on the duration and credit spectrum. We remain underweight, viewing cash as an asset class used primarily for meeting near-term liquidity needs.
Tactical Risk Position:

Neutral

We are neutral risk, with our greatest overweight to high-yield fixed income funded by our underweights to emerging market-equities, inflation-linked bonds and cash. Our risk cases include the Fed tightening too far and the ongoing rift between the U.S. and China. We think high yield will provide upside participation and downside mitigation as compared to equities.
6 Key Themes
Here are the key themes shaping the investment landscape in the year — and years — ahead.
Mild Growth Myopia Icon
Mild Growth Myopia

Subdued economic cycles and stronger financial systems will push out the next recession and limit its severity.

Learn More

Mild Growth Myopia

Two quarters of accelerated U.S. growth showed signs of slowing down toward the end of 2018, but we are not overly concerned.

As such, we head into 2019 looking for opportunities to reassert a risk-taking stance.

Stuckflation Icon
Stuckflation

Low and durable structural inflation has altered both monetary policymaking and investor behaviors.

Learn More

Stuckflation

Inflation remained subdued throughout 2018, remaining below the 2% target.

We expect this theme to continue in 2019, giving central banks an excuse to either pause rate hiking (U.S.) or continue their easy money policies (Europe and Japan)

Pass/Fail Monetarism Icon
Pass/Fail Monetarism

Without a template for policy normalization, central banks’ efforts cannot be graded – but they must not fail.

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Pass/Fail Monetarism

The U.S. Fed risked failing our Pass/Fail Monetarism theme in 2018 with their ongoing hawkish rhetoric, but now seem to be finally appreciating the benign inflationary environment. Such a dovish shift would be constructive for risk assets.

Technology Slowzone Icon
Technology Slowzone

Technology has been pulled into the orbit of government oversight, but will remain a constructive force.

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Technology Slowzone

Once the driver of equity returns, the tech sector took a turn for the worse at the end of 2018. However we continue to believe that tech offers too many benefits to keep it down for long.

Global (Re)Positioning System Icon
Global (Re)Positioning System

The irreversible fade of legacy multi-lateral institutions is creating as many investment opportunities as risks.

Learn More

Global (Re)Positioning System

Recent G-20 meetings indicate that our fairly benign views on protectionism are playing out as we expected.

2019 should see a continued move toward a new global system more appropriate for the 21st century.

Executive Power Drive Icon
Executive Power Drive

Investors are accepting leaders who challenge political norms in order to favorably tilt the economic landscape.

Learn More

Executive Power Drive

Ongoing U.S.-China tensions caused some volatility in the markets throughout 2018.

The upside is that conflicts are now being addressed openly, which should lead to constructive dialog – albeit possibly accompanied by continued volatility – in 2019.

Embracing Risk
The fourth quarter sell-off in financial markets, alongside more dovish commentary from the Federal Reserve, improved our outlook for risk.
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 five-year 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 the 2018 Edition 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 more than $900 billion of assets, 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.

$975 Billion in AUM1

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 June 30, 2019. For the Northern Trust Asset Management entities included in the AUM total, please see disclosure at end of this page.
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