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.”

4. Massive Monetary Toolkit

The central banks have “proved to the markets they weren’t out of ammunition, and began coordinating with the fiscal side,” Browne says. “When you think about those $1,000 payments that were sent to the majority of American households, [it was] by the Fed, [which also] made a commitment to buy a limited amount of Treasuries. … That’s a massive new tool.”

Northern Trust sees U.S. inflation staying at or below 2% over the next five years, and “the de facto monetary-fiscal policy coordination will prevent exogenous shock-driven recessions from becoming depressions,” the report states.

5. One World, Two Systems

The U.S. and China will have to learn to “live on the same planet with their opposing views on economic policy. Collaboration won’t be absent, but won’t be optimal either — leading to inefficiencies,” the report states.

“Globalization is the biggest loser,” Browne says. ”Arguably the world benefited from bringing hundreds of millions of people out of poverty, but it did not lead to a relinquishing of power by the communist party. China is not going to become a South Korea [or] Taiwan. It’s not going to go from a totalitarian state to a democracy. I think that was the hope and expectation of the establishment and they turned out to be wrong.

“…We’re kind of at a standstill looking for areas where we can agree to cohabitate … we haven’t figured out what that equilibrium is. But it will be suboptimal relative to what all thought was the operating model just a few years ago. It’ll be more costly. It’ll cause more volatility in the world. … China and the U.S. will cooperate where it makes sense for both sides. It’s going to be a very transactional type of relationship going forward.”

6. Stay Focused on Climate Risk

“[Sustainable] investing is on the top of minds for all investors and shareholders. And so this issue is not going to go away, but there will be winners and losers,” Browne says.

Government will be forced to confront the challenge, according to the report, which adds that “even central banks are getting into the discussion. The European Central Bank has started to address how it will include climate risk in its monetary policy, viewing climate risk as integral to the economic outlook.”

Notes Browne: “It doesn’t take a lot of imagination to see the issues that drove it in Europe will eventually make its way into the U.S.; maybe not to the same degree of pervasiveness, but certainly more than what we have today.“

Asset Class Forecasts

U.S equities are forecast to grow at a five-year annualized rate of 4.7% (versus 10.8% the last five years). Don’t expect much more for 2020, Browne says, as Northern Trust believes, especially for U.S. equities, that “we’ve realized all the year’s gains.”

He emphasizes that the firm thinks earnings will drive stock prices over the five-year period, not valuation expansion.

U.S. aggregate bonds are forecast to return around 2.3%. Though Northern Trust continues to be a big believer in high-yield bonds, they have taken some profits and moved a bit more into emerging market equities.

Other strong(er) asset classes are private equity at 7.9% and global real estate at 6.3%.

Northern Trust has practiced what it preaches since the inception in 1993 of its $112 million Global Tactical Asset Allocation Fund, which is built around the forecast, and has a four-star Morningstar rating.

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