A new report from Vanguard discusses the investment management firm’s outlook for the U.S. economy and markets over the next decade.
“With so much noise in economic data and short-term market returns, Vanguard believes it is prudent to provide investors with an outlook that represents the potential range and likelihood of asset class returns over the next 10 years, precisely the information most important for long-term investing,” said Joe Davis, Vanguard’s chief economist. “Accordingly, this outlook is not intended to project a short-term view of the markets or the economy.”
Here are some of the highlights of the report:
• The U.S. economic recovery is likely to continue to grow at a below-average 2% to 3% pace, given the continuing concerns about housing, consumer debt and fiscal austerity in Europe and the U.S. Future U.S. economic growth should prove uneven, marked by periodic bouts of market volatility and economic slowdowns.
• An “inflation paradox” is likely to remain in place for much of the developed world, as the attempts of certain central banks to mitigate the deflationary forces of debt reduction and fiscal austerity lead others to worry that markedly higher-than-expected inflation is almost certain in the future. U.S. inflation should average in the 2% to 3% range over the next several years. The report also discusses why the risk of a repeat of the high-inflationary period of the 1970s and early 1980s is estimated to be less than 10%.
• Given the outlook for Federal Reserve policy, real (inflation-adjusted) interest rates are likely to remain negative for years. As a result, savers will remain the “sacrificial lambs” of monetary policy.
• The return outlook for broad bond portfolios is muted. The expected long-run median return of the broad taxable U.S. fixed income market most closely resembles the historical bond returns of the 1950s and 1960s. The diversification benefits of bonds are expected to persist, despite the tendency for slightly higher interest rates over the next decade.
• The long-run outlook for the global stock market is likely to be attractive despite elevated market volatility, below-average growth expectations and near-0% short-term interest rates. As a result, balanced portfolio returns over the next decade have a higher chance of matching their long-run averages than some may think, especially when those returns are adjusted for Vanguard’s outlook of future inflation.
• While some have suggested that the next decade warrants a radically new investment strategy, Vanguard maintains that the principles of portfolio construction remain unchanged, given the expected risk-return trade-off among stocks and bonds.