We start the new year with pockets of global economic strength -- for example, new orders at U.S. industrial companies in December outpaced even the famed BRIC (Brazil, Russia, India and China) countries, while strength in China has led the Chinese government to increase the required reserves held by its banks in an attempt to moderate growth. Developed markets outside the United States, particularly Europe and Japan, have shown more disappointing economic progress. European consumer spending seems to be taking a mid-winter holiday, and Japanese officials have restarted quantitative easing to combat deflationary forces.

Political leaders globally seem to be struggling to develop economic growth plans as a sequel to the broadly successful financial stabilization efforts. This challenge should force the Obama administration more toward the center politically, as a message of job creation and deficit reduction will be needed for the mid-term elections. European leaders are struggling with the varied fiscal woes of their member countries, as exemplified by the challenges surrounding Greece's debt problem. The recently elected Democratic Party of Japan, out of power for virtually the entire last 60 years, is trying to restart economic growth after that economy has now experienced six consecutive quarters of contraction in nominal economic growth.

Significant market appreciation in 2009 left some assets fairly valued and still offering good return potential, while others have a reduced return outlook. We are most interested in those assets that will generate solid returns or offer protection of principal in our base case scenario, which is measured global growth with accommodative central bank policies. But we are also keen to include assets that we feel will perform acceptably in our primary risk case scenario -- that of the Federal Reserve and other central banks tightening policy prematurely. We feel the significant appreciation in the U.S. investment-grade bond market, due to a wall of money flooding into it in the wake of improved fundamentals, has left this asset class with a less attractive return profile in the event of a disruptive market event.

View a chart that shows Northern Trust's current recommendations for tactical asset allocation.

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