Coronavirus Questions Reshape Long-Term Capital Market Assumptions

Given the dramatic national and global events that have unfolded so far in 2020, it can be difficult to bring one’s mind back to the state of affairs in late 2019—before the outbreak of the coronavirus pandemic and the emergence of social and political turmoil that have challenged business leaders, lawmakers and everyday citizens alike.

At the time, asset managers and market observers were contemplating the implications of a record-long bull market that seemed set to enter a new decade with a real measure of stability and momentum. The primary sources of concern were geopolitical in nature—from trade tensions between the United States and China to concerns that new wars could break out in the Middle East—as well as the much-debated inversion of the yield curve.

Those challenges seemed significant but fathomable at the time, so asset managers continued to voice cautious optimism about short- and mid-term outlooks for the U.S. and global markets. Much has changed in the present moment, however, and comparing asset managers’ five-year capital market assumptions published in late 2019 and early 2020 with the newly updated versions being circulated today is an eye-opening exercise.

The updated reports are notable, of course, for the nearly across-the-board reduction in return expectations for various asset classes. Perhaps even more remarkable is the admission that so much remains uncertain about how the U.S. and global economies may behave in the coming years, as humanity seeks to eradicate, or at least better control, the novel coronavirus.

Northern Trust’s newly updated five-year market outlook report, for example, now projects global stock returns between 3.8% and 8.2%. This is a huge range compared with the normal projections published in such reports. For comparison, the Northern Trust forecasts published in early January flatly predicted 7.5% equity market returns for the U.S. and 8.6% returns for developed markets outside the United States.

More broadly, the Northern Trust’s new outlook projects just 2.6% real average annualized global gross domestic product (GDP) growth over the next five years, along with a continuation of tepid inflation and accommodative monetary policy. The firm predicts interest rates will remain historically low, with the U.S. Federal Reserve not raising its federal funds rate for at least five years. Though interest rates had remained quite low prior to the coronavirus outbreak, the expectation that rates won’t increase again for possibly five years is new.

On a global basis, Northern Trust now foresees average annualized equity returns in the mid-single digits, except for emerging markets in Latin America (8.2%) and in Europe, the Middle East and Africa (7.1%). The next highest equities forecasts are for Australia at 5.8%, the United Kingdom at 5.6%, and Europe, excluding the United Kingdom, at 5.4%. The lowest Northern Trust forecasts are for Japan at 3.8%, Canada at 4.5% and the U.S. at 4.7%. In fixed income, except for a 5.6% return expectation for global high yield, including 5.5% for the U.S. and 5.2% for Canada, the report is calling for returns mainly in the 1% to 3% range.

“Investors need to come to the realization that many of the jobs lost because of the virus are never coming back, with the permanent loss of many brick-and-mortar retail stores a major reason,” says Northern Trust Chief Investment Strategist Jim McDonald. “And, we can’t forget that the pandemic stimulus packages have added trillions of dollars to what were already staggering government debt levels in many countries.”

The report notes that, even as the coronavirus pandemic has created massive new challenges for the U.S. and global economies, there has been no lessening in tensions between the U.S. and China. The report suggests these tensions now extend beyond trade into blame for the virus—and that they affect not only the two countries, but many others around the world. The report suggests other countries and multi-national companies will be “forced to pick a side or remain neutral.”

“Regardless of their choice, they, along with the principal combatants, will suffer from lost economic opportunity or economic inefficiencies, and, very likely, both,” the report warns.