Vanguard on Tuesday released its 10-year projected returns for stock and bond markets, an eagerly awaited piece of research out of the world's largest mutual fund firm with over $5 trillion in assets.
Vanguard published a range of annual market returns the firm forecast for the next 10 years:
U.S. equity returns: 4% – 6%
U.S. aggregate bond returns: 2.5% – 4.5%
International equities returns: 7.5% – 9.5%
International bond returns (hedged): 2% – 4%
Vanguard's annual market forecasts are "nominal" returns, meaning they don't account for inflation. Assuming 2% annual inflation would lower those forecasts by the same amount; for example, equity returns after inflation, or "real" returns, would be 2 to 4% annually.
Vanguard also said it sees no imminent recession threat, and said the U.S. economy is currently in the mid- to late-stages of the business cycle. The firm predicts a 35% chance of a recession in the next 12 months.
As for the bond markets, Vanguard noted that the yield curve (as traditionally defined by the 3-month and 10-year U.S. Treasury) briefly inverted in late March. Some market watchers say that an inverted yield curve is a predictor of recession.
But "a key distinction about this inversion compared with others is it's driven almost exclusively by long-term rates dropping below short-term rates," Vanguard wrote in its forecast report. "We see little evidence that the inversion, in isolation, is signaling a recession in 2019/early 2020."
However, "the expected easing of global growth in the next two years - driven by a fading boost from U.S. fiscal stimulus and the continued slowing of growth in China - is fraught with economic and market risks. "
Vanguard believes the U.S. economy can tolerate an additional interest rate hike, but that "the Federal Reserve has clearly stated its intention of no hikes in 2019. We do not see a valid justification for cutting interest rates as of now, and given our expectation for a modest recovery in the second half of 2019, a cut seems quite unlikely."
Core inflation should remain near or below 2% while an escalation in tariffs would "only temporarily" affect U.S. core inflation.
Long term, Vanguard's 10-year outlook for investment returns "remains guarded, given the backdrop of high valuations and depressed risk-free rates across major markets."
Returns in global equity markets are likely to be about 4.5 to 6.5% for U.S.-dollar-based investors, Vanguard added. Vanguard foresees improving return prospects in non-U.S. developed markets, building on slightly more attractive valuations.
U.S. fixed income returns are most likely to be in the 2.5 to 4.5% annual range, driven by rising policy rates and higher yields as central bankers' policy normalizes, the Malvern, Pa.-based investment giant wrote.
Vanguard expects the global economy to continue to grow, albeit at a slightly slower pace, over the next two years. Trade, policy, and financial market uncertainty may prompt growth scares.
U.S. economic growth should drop back toward a more sustainable 2% a year as the benefits of expansionary fiscal and monetary policy abate, Vanguard said.
China's growth will remain near 6% a year, with increasing policy stimulus applied to help maintain that trajectory. Vanguard estimates that a "sustained growth-scare scenario in China could have a negative impact on U.S. growth of nearly 30 basis points," or 0.30 percent.
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