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What Really Matters Over the Next 5 Years

COVID-19, the U.S. presidential election, Brexit risk, more deficit spending, higher deficits, China’s aggressive actions — are these what will really matter over the next five years? CIO Bob Browne explains.

  • So Many Things to Think About
  • Lower for Longer: Very Likely and Highly Consequential
  • Follow the Certainties


[MUSIC PLAYING] Hello, I'm Bob Browne, the chief investment officer for Northern Trust. There really is so much to talk about these days-- COVID-19, the US presidential election, Brexit risk, more fiscal stimulus and higher deficits, China's aggressive actions. But what will really matter over the next five years, not just in terms of potential impact, but the probability of occurring? That is, what will likely happen? And if it does happen, how consequential will it be? Let's find out.

There is no shortage of possible important events on the horizon. But some like a vaccine for COVID-19 are less certain than others. Other events, such as the potential election of Democrat Joe Biden for US president, might seem more certain now. But the actual consequences of that event are less certain. What investors should focus on are highly-likely events with highly-likely consequences.

When I think about the long list of potentially important events and then think about the likely, if not certain, consequences of those events, one item particularly stands out in my mind. The Federal Reserve will keep interest rates at 0 for years to come in the most important debt market in the world. And that will have very likely consequences.

Northern Trust has been in the lower for longer interest rate camp for some time. It has been driven by our expectation for modest economic growth and persistently low inflation, which we call stuckflation. COVID-19 only reinforced that belief although it remains to be seen whether governments continued unprecedented stimulus will finally put stuckflation to the test.

While low inflation might be tested, we don't think it will fail. The Fed will remain accommodative. And it will not have a justified reason to raise rates for years given both economic and political realities.

And so the global not just the US risk-free rate will remain at 0. This means that all future cash flows are worth more, supporting all cash-flow positive assets. And it also means it is easy to finance debt, supporting all types of debt instruments. Both assets and liabilities benefit when their risk-free rate is 0 for years to come. The market does not seem to fully appreciate that simple fact.

It is important to appreciate that there are so many uncertainties. And it is easy to be distracted by them. As important as COVID-19 is, for now it should be in the I have no idea what's going to happen category. And Brexit-- well, that has been a wild card for years. But the Fed keeping rates at 0 for years-- we think that truly is a certainty. And the consequence is supportive of both assets and liabilities.

We have been fully invested but modestly underweight risk in the past several months. Diversification and flexibility are as important as ever. The certainty of income up front from high-yield bonds should be valued when interest rates are low. Taking on risk from expensive assets such as US equities should be questioned when there are still so many unknowns. Get paid for the risk you take matters more now than ever. I hope you all stay safe and healthy.


Bob Browne, CFA

Chief Investment Officer
Bob Browne is the chief investment officer for Northern Trust and is responsible for the investment performance, process and philosophy across multiple investment strategies, including fixed income, active equity and passive investments.