Northern Trust's Portfolio Allocation Thoughts for the Current Market Environment

As investors look for ways to position their portfolios for the year ahead, one can take a look at Northern Trust’s comprehensive outlook on asset allocations.

In the upcoming webcast, A Better Pie: Asset Allocation for the Next 5 Years, Jim McDonald, Chief Investment Strategist, Northern Trust Asset Management, underscored the ongoing broad global economic recovery that we are experiencing today. For example, most global Manufacturing PMI Survey results show a reading above the 50 level, which indicates an expansion. Meanwhile, consumer activity, industrial activity, citizen mobility and financial conditions are all steadily improving after the steep falloff in March.

The Federal Reserve’s quick and aggressive monetary policy response has been highly effective, shrinking the spreads on riskier assets like investment-grade corporates and high-yield debt. We are also seeing the percentage of distressed high-yield bonds quickly falling off. The strategist, though, argued that the aggressive stimulus measures may not immediately translate to heightened inflation.

“We believe inflation faces a test from many of this year’s themes, notably Retooling Global Growth; One World, Two Systems and Massive Monetary Toolkit, but the effects of slow growth, technology and automation may keep inflation at or below central bank targets,” McDonald said.

“A confluence of developments expected to push inflation higher but not above central bank targets,” he added.

Nevertheless, the coronavirus pandemic remains an overarching theme that continues to weigh on the growth outlook. While we have passed the peak in new Covid-19 cases in many regions, there are still areas around the globe that continue to see spikes in infections, which may trigger further localized shutdowns and disruptions to local businesses.

As investors look for ways to growth wealth in this type of environment, U.S. equities have led the charge. However, this has caused U.S. stock markets to look pricey relative to other global markets. Looking ahead, investors should not expect this rapid pace to continue and look for a more moderate growth outlook.

“We believe companies may prioritize stability over profitability by re-routing their supply chains, moving production inside their home countries, and building healthier balance sheets. After the stimulus-induced surge, global growth may settle at low levels,” McDonald said.

“Economic growth expected to slow after upfront bounce back from COVID-19 disruptions,” he added.

The upcoming November presidential election is also a focus point. Former Vice President Joe Biden has steadily gained in polls, and betting sites are even predicting a higher chance of a Biden win. Consequently, investors will have to think about the potential consequences of a Democratic majority in the government, notably economic policy changes and potential corporate tax hikes.

In this type of environment, McDonald highlighted Northern Trust’s current tactical positioning, with a moderate underweight to risk assets. Specifically, the asset manager has an overall overweight to U.S. investment grade debt and U.S. high-yield bonds for their more attractive yield generation in a lower-for-longer rate environment and supportive monetary policies. The strategist also argued for a slight overweight in global-listed infrastructure, which may help capture the increased fiscal spending to support local economies in a post-coronavirus world. Additionally, they have shifted to a slight underweight toward U.S. equities and emerging market equities.

Financial advisors who are interested in learning more about asset allocation strategies can watch the webcast here on demand.