Infographic: Vanguard's 2019 economic and market outlook

March 27, 2019

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Down but not out

Our ten-year outlook (2019–2028) for investment returns remains guarded, given elevated valuations and low interest rates across major markets. With global growth set to slow and a number of risks on the horizon, investors should remain focused on what they can do to contribute to their investment success.

Investment outlook

Expect low returns for the next decade

Expect low returns for the next decade chartExpect low returns for the next decade chart

Changing strategies may not help much

Changing strategies may not help muchchartChanging strategies may not help muchchart

Outlook by sub-asset class: No pain, no gain

Over the next decade, risk will come with higher volatility, but not necessarily proportionally higher returns.²

Outlook by sub-asset class chartOutlook by sub-asset class chart

Global and regional economic outlook

Is a global recession imminent? Risks have risen, but many countries, including the U.S., are not at the end of their economic expansion

Is a global recession imminent graph Is a global recession imminent graph

U.S. indicators as a whole are not flashing red

Although a few of these indicators are consistent with a slowdown, most suggest that the economic recovery—now in its tenth year—could persist at least through 2020.

U.S. indicators as a whole are not flashing red graphU.S. indicators as a whole are not flashing red graph

Bottom line: Growth is slowing but not stalling

Growth is slowing but not stalling mapGrowth is slowing but not stalling map

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¹ The figure shows summary statistics of 10,000 Vanguard Capital Markets Model® (VCMM) simulations for projected ten-year annualized nominal returns as of September 2018 in USD before costs. Historical returns are computed using indexes defined in "Indexes used in our historical calculations" on page 5 of the paper. The global equity portfolio is 60% U.S. equity and 40% global ex-U.S. equity. The global bond portfolio is 70% U.S. bonds and 30% global ex-U.S. bonds. Portfolios with tilts include a 20% tilt to the asset specified funded from the fixed income allocation for the fixed income tilts and the equity allocation for the equity tilts. Source: Vanguard.

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of September 30, 2018. Results from the model may vary with each use and over time. For more information, see the paper's Appendix section "About the Vanguard Capital Markets Model."

² Forecast corresponds to distribution of 10,000 VCMM simulations for ten-year annualized nominal returns as of September 30, 2018, in USD, for asset classes shown. Median volatility is the 50th percentile of an asset class's distribution of annual standardized deviation of returns. See paper's Appendix for further details on asset classes shown here. Source: Vanguard.

³ The vertical axis represents GDP growth rate relative to each country's potential growth rate, represented by the horizontal line. There is no inherent time limit on the length of each stage; different economies progress through the stages at varying speeds. The end of an expansion represents below-trend growth, which may or may not match the common definition of recession of two consecutive quarters of negative real GDP growth. Sources: Vanguard and the International Monetary Fund.

⁴ The figure displays the underlying components of the cyclical index in Figure I-2a in the paper, presenting the current level relative to historical observations. Underlying indicators: Economic and labor market slack = output gap, U3 and U6 unemployment rate gap relative to nonaccelerating inflation rate of unemployment. Inflation = personal consumption expenditures (PCE), core PCE, average hourly earnings, unit labor costs. Consumer demand = housing starts, residential investment, nonresidential investment, durable goods consumption. Business and consumer sentiment = business optimism, consumer sentiment, consumer confidence. Household and corporate leverage = household financial obligations ratio, nonfinancial corporate debt, Federal Reserve Bank Senior Loan Officer Opinion Survey for consumer and commercial and industrial credit terms. Corporate earnings = corporate profits. Financial conditions = Vanguard financial conditions index, yield curve (measured as the 10 year-3 month Treasury yield). Asset prices = Vanguard's fair-value cyclically adjusted P/E ratio, corporate option-adjusted spread (OAS) spread, high-yield OAS spread. Tightness of monetary policy = federal funds rate versus neutral rate estimated by the Laubach-Williams (2003) model. Data range is 1980 Q1-present. Sources: Vanguard, Moody's Analytics Data Buffet, Federal Reserve Bank of St. Louis, and Laubach, Thomas, and John C. Williams. 2003. Measuring the Natural Rate of Interest. The Review of Economics and Statistics 85(4): 1063-70.

⁵ Source: Vanguard.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based. The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard's Investment Strategy Group. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies.

The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

Notes on risk:

  • All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Investments in bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
  • Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries. U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent price fluctuations. Investments that concentrate on a relatively narrow market sector face the risk of higher price volatility. Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. High-yield bonds generally have medium- and lower-range credit-quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit-quality ratings. Although the income from U.S. Treasury obligations held in the fund is subject to federal income tax, some or all of that income may be exempt from state and local taxes.