In February, Northern Trust Chief Investment Officer Bob Browne told ThinkAdvisor that the coronavirus wouldn’t be just a “blip” in the global market, and in fact, would have a major impact.
He was proven right as global markets crashed, companies shuttered, jobs disappeared and massive government stimulus packages were enacted.
Although the pandemic brought global economies to their knees, Browne does see at least the U.S. economy bouncing back for the rest of this year, largely due to government stimulus. It’s 2021 and beyond we have to plan for, he says.
Here are the firm’s six key capital market assumptions and outlook:
1. A Big Restructuring
Northern Trust predicts a “positive yet subdued growth environment,” Browne says. The trillion-dollar stimulus pumped into the U.S. economy means growth should be fine for the rest of 2020, but going forward, he sees U.S. growth just under 2%, while globally it will be around 2.6%.
Due to the pandemic, companies will prioritize stability over profitability by rerouting supply chains, moving production inside their home countries and building healthier balance sheets.
That means the United States will have to cut its reliance on products from China, Browne says. But U.S. strength in technology and biotechnology should “shield” it from the downside this will cause.
Although many jobs are coming back due to reopening of businesses in parts of the country, “There’ll be a restructuring of high unemployment for some period of time. Lots of jobs will be permanently destroyed,” Browne says, such in the retail sector and tourism industry. “That means a cautious consumer and the experience of COVID-19 won’t disappear too quickly.”
2. Stuckflation Tested
Trillions of dollars of stimulus money has been pumped into the global economy, but because most of it was used to prop up people and businesses hurt by the pandemic, the threat of a money surge causing higher inflation is low. Further, central banks will allow “somewhat higher” inflation to make up for a decade of low inflation, Browne says.
For the next five years, the bank sees 2% inflation for the United States, 1.4% for Europe and 0.3% for Japan.
“I still believe that lower inflation, or even deflation, is a bigger risk for policymakers … maybe at some point bond investors will think they aren’t getting compensated … but for now they’re willing to accept negative real rates because they want stable income with principal stability in a world of uncertainty,” Browne says.
2. Reimagining Capitalism
“The pandemic has not only altered economic growth trajectories, it also highlighted flaws in the capitalist economic system itself,” the Northern Trust report states. Specifically, it has forced companies to focus more on stakeholders — employees, customers and community — than shareholders.
“But one societal aim — reducing inequality — has only gotten worse over the past 40 years,” the report states, noting that today the top 1% of earners in the United States have 20.5% of pretax national income, up from roughly 11% in 1980.
But change is happening, Browne says, and every large company is “thinking about its obligations to create a more [diverse workforce], to invest back in the community, that we all have a stake in making sure society succeeds broadly, and it’s not a ‘winner take all’ environment,” which he doesn’t see as politically or socially sustainable.
However, this change also means the “power dynamic for stakeholders shifts,” Browne says, which hasn’t “been appreciated by the market yet.”