Market watchers have had a lot to keep their eyes on over the past year. Investors initially responded to America’s newfound populism with euphoria; promises of new jobs, infrastructure projects, and tax reform sent markets soaring. But now that pro-growth policies seem unlikely—at least in the near term—markets have settled into an uneasy rally. As Goldman Sachs CEO Lloyd Blankfein noted in an interview with The Wall Street Journal last week, many investors are starting to feel like the market has been going up for too long.
Despite a growing nervousness from investors, Jim McDonald, chief investment strategist at Northern Trust, remains calm. The recently released mid-year outlook from Northern Trust’s Capital Market Assumptions Working Group, notes that the new wave of populism here at home and abroad could end up being more muted than originally expected.
“If you look at France and India, for example, the outcomes of those elections could have been much different, but it looks like we’ll have more constructive administrations in both places,” he tells CIO. He adds that the uncertainty over policy in the US in some ways helps to maintain the status quo.
Looking ahead, McDonald remains constructive on US equities. “We think there is growing fundamental support for valuations,” he says. “Second quarter earnings were solid. The market is moving with earnings growth, which is positive.”
Continued strength from the equities market may be the most consistent return-driver allocators can hope for—at least in the near term. Central bank policy got murkier this week, with dovish comments from the European Central Bank and a debt ceiling deal in the US that could impact the Fed’s December meeting. In the outlook, McDonald notes that policy concerns like these, along with low inflation, could make it harder for the Fed to continue its push to raise rates. So far, investors are snapping up safe haven bonds, but market expectations about both Fed policy and the makeup of the committee have changed abruptly. “We expect that ‘lower for longer’ will continue,” McDonald says. “Investors will need to be careful if they go hunting for yield in this environment. If you screen for yield, you also need to look closely at quality.”
Looking ahead to the fourth quarter and into next year, McDonald has a positive outlook overall. He expects that US and global equities will continue their positive trajectory, boosted by strong corporate performance. Despite sluggish inflation growth, he is also strategically weighted to all four risk assets: inflation-linked bonds, natural resources, global real estate, and global listed infrastructure. “Broadly speaking, even though there is some uncertainty out there, we think there is support for an overweight to risk over the next 12 months.”