Perspectives : Markets & Economy | March 20, 2023

Uncertain but navigable conditions: Vanguard weather

Read time: 7 minutes

The renewed volatility of the markets over the past few weeks has been unnerving to many investors. The noise in the media couldn’t get much louder. And yet ... as a company, we tend to shine the brightest when the surrounding environment is clouded with uncertainty. This isn’t a new phenomenon for us. In fact, we often refer to periods of extended uncertainty as ‘Vanguard weather.’ Bill McNabb August 31, 2011

Vanguard’s then-CEO Bill McNabb wrote those words to Vanguard crew amid a sharp downturn in global stock markets, which followed Standard & Poor’s downgrade of U.S. sovereign debt from AAA to AA+. In so doing, he continued a tradition of company executives invoking “Vanguard weather” in messages to crew and clients alike. 
Springtime may be fast approaching in the northern hemisphere, but Vanguard weather—marked by high levels of financial market volatility and economic uncertainty—is upon the financial world once more.

Facing the reality of current challenges

Numerous increases in the interest rate targets set by major central banks—in the United States, the Federal Reserve’s historically aggressive campaign to rein in inflation just turned a year old—have helped curb price increases, as intended. But inflation in the United States, Europe, and elsewhere remains too high. Unintended effects of higher rates have surfaced in the form of some instability in the banking sector. Stock and bond markets worldwide have grown more volatile.

Vanguard economists’ “base case” for 2023 has long involved a U.S. recession in the second half of the year. Conditions in the banking sector and the softening of the housing market highlight the impact that rising rates have on rate-sensitive economic sectors. Markets may remain volatile in the weeks and months ahead as the full impact of continued monetary tightening becomes apparent. 

Our forecasts of the peak Fed rate and recession likelihood remain unchanged

We continue to expect the Fed to ultimately raise its current 4.5% policy rate to 5.5%–5.75% and leave it there through at least the end of 2023. We’ve recently increased our view for the European Central Bank (ECB) terminal rate, to a range of 3.75%–4%. The ECB’s March 16 action lifted its key rate target to 3%.

We also continue to expect mild recessions in major developed economies, including those of the United States, the United Kingdom, and the euro area, in 2023.

Vanguard Global Chief Economist Joe Davis said financial stability is apt to prevail and the Fed likely will pause its course of interest rate hikes before year-end.

“But financial stability does not preclude financial market volatility,” Davis said. “As we noted in our economic and market outlook this year, bringing inflation down was never going to be easy.”

How to weather today’s challenging investing climate

We encourage our clients to consider their role in the markets. Securities traders try to anticipate and capitalize on short-term changes in market interest rates and securities prices. Investors, in contrast, should maintain a much longer-term focus, commensurate with their time horizons.

We believe that the critical steps for investors are to:

  • Align their asset allocations with their risk tolerance.
  • Control costs.
  • Adopt realistic expectations.
  • hold a broadly diversified portfolio.
  • Maintain discipline.

We are confident that investors armed with well-considered investment plans and realistic expectations can navigate the current bout of Vanguard weather and continue to make progress toward their long-term financial goals. 


  • All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
  • 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. Diversification does not ensure a profit or protect against a loss.
  • 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.
Joseph H. Davis, Ph.D.

Global Chief Economist and Global Head, Investment Strategy Group