Workers may be getting a break in 2019 with higher wages and no inflation, Vanguard predicts.
Vanguard economists do not see a material risk of a rise in core inflation, despite lower unemployment rates and higher wages, Vanguard said in its 2019 economic and market outlook, which includes Vanguard economists’ view of the economy for the coming year.
“Higher wages are not likely to funnel through to higher consumer prices, as inflation expectations remain well-anchored. In the U.S., core inflation will likely continue hovering near 2 percent,” Vanguard said.
“Despite slowing global growth, disparate inflation rates, and continued normalization for monetary policy, Vanguard economists believe that a near-term recession will be avoided,” the report said. “From an asset return standpoint, Vanguard foresees a 10-year outlook for a balanced portfolio in the 4 percent to 6 percent range, representing a modest improvement over 2018.”
“While market volatility over the past two to three months has some investors overly cautious going into 2019, our outlook, while still guarded for the near-term, shows optimism for long-term investors as we move into the next year,” said Dr. Joseph Davis, Vanguard’s global chief economist and head of Vanguard’s Investment Strategy Group. “Higher short-term interest rates, coupled with improved international equity market valuations, slightly raise our expectations for long-term global investment returns for U.S. investors.”
The U.S. is not likely to face a recession this next year although there will be a slowdown in growth, led by the U.S. and China.The bad news in the predictions is that there will likely be an increased risk of volatility.
As far as interest rates are concerned, Vanguard predicts the Federal Reserve Board will continue on a gradual rate hike path, reaching the terminal rate of 2.75 percent to 3 percent in mid-2019, followed by a pause or stop to reassess economic conditions.
“While our return outlook remains guarded and well below historical norms, Vanguard economists have found some optimism for long-term investment returns over the next decade. According to Vanguard’s Capital Markets Model projections, our global outlook for equities is a return in the 4.5 percent to 6.5 percent range,” Vanguard says. “This remains starkly lower than the experience of previous decades and of the post-crisis years, when global equities have risen 12.6 percent a year since the trough of the market downturn.”
Diversification will be important for 2019 because U.S. equities will be slightly lower than those for global or international markets. Vanguard’s outlook for U.S. equities over the next decade is in the 3 percent to 5 percent range “and we can expect to see equity valuations continue to contract as interest rates rise over time. For non-U.S. equities, investors will likely see returns in the 6 percent to 8 percent range.”
The expected interest rate increases will positively benefit fixed income markets compared to previous years. Over the next 10 years, investors can expect to see global fixed income returns in the 2.5 percent to 4.5 percent range. Non-U.S. bond investors could expect slightly lower returns from 2 percent to 4 percent.
“As the global markets continue to move into a lower orbit of returns, it’s only natural that investors start seeking out strategies to help increase their chances for investment success,” Davis said. “These strategies, like reaching for yield or reaching for return, while tempting, are still unlikely to escape the forces of expected lower portfolio returns, especially when compared with the unprecedented returns investors have experienced over the past decade.”