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The Trump bump for the US economy may soon flatten.
Like many other investors, Northern Trust Wealth Management— which has $287 billion in assets under management — had taken the view that tax cuts and other policies would inject more fuel into the US economy. The firm oversees $1.2 trillion overall.
But at a meeting last week the firm downgraded its views, saying that a year from now the economy may not live up to the lofty expectations. In that sense, it’s a wake-up call for investors with rosier outlooks than theirs.
Business Insider recently spoke with Katie Nixon, the chief investment officer at Northern Trust Wealth Management, about why the unit changed its views on the economy and how it’s positioned to benefit from this forecast.
Interview condensed and edited for clarity.
Akin Oyedele: You recently downgraded your US outlook. Why?
Katie Nixon: For several years, we had been thinking the US economy would surprise to the upside. Last year the market went up so much but we weren’t too surprised because it was doing a little bit of catch-up to a scenario that we had seen unfolding, which was good growth propelled by tax reform.
When we met last week, though, we thought, “What is this going to look like a year from now as we look back?” And right now, there’s probably room for a little bit of disappointment relative to expectations. So we downgraded our growth forecast for the US, developed ex-US, and emerging markets because we think expectations have perhaps gotten a little bit ahead of reality.
Clearly, here in the US, we’re very late in the economic cycle. We do have the Trump tax-reform tailwind, but that dissipates over time, and we’re seeing some offsets in the form of a stronger dollar and higher oil prices.
And clearly we’re seeing some disappointments across Europe, including some of the data we got on Monday and Tuesday, which suggest that Europe is not firing on all cylinders yet.
We do have the Trump tax-reform tailwind, but that dissipates over time, and we’re seeing some offsets in the form of a stronger dollar and higher oil prices.
We see, in China, a managed slowdown, a deliberate emphasis on the quality of growth over quantity, which should be welcome to investors, but, from a macro perspective, certainly represents a slowdown. That will impact not only emerging Asia but probably Europe.
We took our growth forecasts down for all those reasons.
Similarly, we don’t think inflation is going to be an issue across any of these regions. We’ve had a durable theme of “stuck-flation” for a couple of years now, and that theme persists. Everyone’s waiting with bated breath for inflation to show up, and it just hasn’t, even this late in the cycle with unemployment at 4%.
Because of the former discussion on growth and inflation, we think the Fed’s going to be probably a lot more patient than the market expects.
Oyedele: How have these views affected your portfolio?
Nixon: The change in our tactical portfolio was relatively modest. Intuitively, if our base case is that the Fed will be slower, that growth may disappoint, and that inflation remains benign — which is a bit out of consensus right now — then a 10-year Treasury at 3% probably represents a pretty good deal.
We actually took some cash off the sidelines — 2% cash — and reinvested it in investment-grade bonds, thinking that the market has gotten ahead of itself in terms of expecting a more aggressive rate-hike path than we think. So we moved out of cash into fixed income.
We didn’t touch our risk assets or our equity assets because the kind of environment that I describe — low inflation, accommodative central banks, and modest positive growth — is pretty good for stocks.
Oyedele: Given the outlook, are there any other specific parts of the market you think are attractive right now?
Nixon: As I mentioned, we still like risk. We like equities quite a bit right now. We’re overweighted in developed ex-US and emerging markets in particular. We’re fairly equal-weighted in the US right now, recognizing that the US has been the best-performing market for quite some time, and recognizing that valuations are a little bit more reasonable in developed ex-US and in emerging markets, and both of those are much earlier in their economic cycles than the US.
The big trade that we saw last week was, given the move in the bond market, increasing our allocation to bonds consistent with our views that the Fed will have to be a lot more patient.
Unfortunately, when you look across the capital markets right now, there’s not necessarily a fat pitch to be had.
We moved out of cash into fixed income.
Oyedele: If you were to do a temperature check of the economy based on your conversations with clients, what does that look like?
Nixon: Many of them are business owners, so they really have their finger on the pulse of what’s going on outside of the ivory tower.
They’re feeling really good. They’re seeing the benefits of, in particular, the tax reform, which is a direct and immediate benefit in terms of lowering their tax rate and increasing their earnings, and certainly their cash flow.
We also have clients who are C-suite executives. These are clients that are running publicly traded companies. Of course they are seeing very good trends in their businesses.
But I think the interesting thing is in terms of what they’re doing with the tax largesse. There seems to be a bit of reluctance to over-invest right now. You see a lot of stock buyback and balance-sheet activity as a function of the tax reform, but we’ve seen a bit of hesitancy around the capex cycle that everyone’s waiting for.
In terms of structuring their businesses for the expectation of much higher growth into the future, we’re not quite seeing that. Maybe it’s a delayed reaction and it’s sort of a wait-and-see approach, but that’s what we’re hearing from clients.
Across the board, what clients worry about is inflation. These are folks who have experience in living through inflationary environments.
And finally, the worry that I hear most commonly across our client base is the ultimate impact of increasing debt and deficits and what that might mean to growth and interest rates.
Oyedele: When you say debt and deficits, is that at the federal level?
Actually, I had a client meeting yesterday, and there was head-scratching going around the table of people saying, “The bond market doesn’t seem to be too concerned about the long-term impact of some of the fiscal policies that are being enacted right now.” If there were more broad-based concern about this, you would expect to see a much higher Treasury yield than we see right now. And so the market seems to be sending a very strong message that it’s not going to be an issue.
Start saving and enjoy the eighth wonder of the world, which is compound interest.
Oyedele: What advice would you give someone starting their career in terms of best practices to thinking about money, wealth preservation, and investing?
Nixon: This is going to be such a simple answer, but it’s the most powerful answer I can give, and that is, save as much as you can as early as you can. Start saving and enjoy the benefits of the eighth wonder of the world, which is compound interest. Recognize your long-time horizon and save and invest accordingly.
We work with a lot of multigenerational families, and when we’re talking to some of our younger clients, who are 19 and 20 years old, we give them this advice: Don’t be afraid to invest. Markets don’t go up every year, but, over time, they do go up. Form a habit and keep investing over time, and recognize that people who are young right now potentially could live well past 100 years old.