“The turmoil caused by the pandemic has triggered a change in fundamental and macroeconomic variables that could affect future market performance, particularly on the equity side,” the report said.
It noted that U.S. equities went from being overvalued before the pandemic to undervalued by the end of March, and that the subsequent stunning rally elevated the U.S. market to fair-value range. And it said the ex-U.S. developed market, while still fairly valued, is closer to the undervalued range and is more attractively priced.
“Given lower current valuations, especially in the international market, and a higher fair-value range because of lower interest rates, our outlook for U.S. and international equity returns has improved compared with our expectations at the end of 2019,” Vanguard said.
Specifically, Vanguard’s investment strategists expect average annual returns of 4% to 6% for U.S. equities over the next 10 years, versus annualized returns of 7% to 9% for international equities during that period.
Vanguard concluded its report by stating that policymakers might be putting too much weight on the prospects of a universally available effective vaccine, while investors run the risk of pricing assets close to perfection by assuming that corporate profitability will soon return or that central banks will keep priming the pump with accommodative monetary policy.
“Investors will be well-advised, as always, to maintain appropriately diversified portfolios appropriate to their goals,” the report said. “Attempting to time the market during extreme market volatility is tempting but rarely profitable.”