Most Americans understandably are worried about their friends and family surviving the next three weeks or three months, as well as their employers and their jobs. Many also are getting cabin fever after only a few days of shelter-in-place restrictions.

But for financial advisors and others willing to look out over the next decade, Vanguard chief economist Joe Davis sees a silver lining. In a note to clients penned on Monday, Davis writes that Vanguard's proprietary model predicting 10-year returns for the S&P 500 has climbed to 6.8% annualized from a modest 4.4% on December 31.

For investors, that means "there are better days ahead," Davis writes. Retirees and 401(k) plan participants could use some good news after watching the major indexes plunge sharply in what analysts are describing as the fastest bear market in modern times.

Davis's note to clients was written on Monday when the S&P 500 had fallen 37% since mid-February. By Thursday, the index had recovered by 12% but few obsevers believe the volatility is over.

Vanguard's model, he adds, has limited predictive value over the near term. However, "over longer periods we've had a fairly good record of anticipating where future stock returns would be, on average, over the next 10 years," Davis writes. "Our forecasting accuracy results from our framework that is based, in part, on stock-market valuations."

For those who want to get technical, the "forecasts correspond to the 25th to 75th percentile of distributions of 10,000 Vanguard Capital Markets Model simulations for ten-year annualized nominal returns," a footnote declares.

Several weeks ago, Vanguard senior economist Andrew Patterson told me that the investment giant's estimate of fair value for the S&P 500 ranged between 2,600 and 3,300. That fair value calculation is based on interest rates, inflation and inflation expectations.

Before the coronavirus panic infected the financial markets, the index was approaching 3,400. Even after yesterday's 10% plus rally in most indexes, the S&P 500 remains well below the low end of that range. In his note to clients, Davis adds the theme of undervaluation "broadly holds true for" equities outside the U.S.

While Davis believed equities were overvalued at the start of 2020, he acknowledges the speed with which stock prices have corrected has taken him by surprise.

Davis also says the looming recession could be one of the "shortest," though sharpest, in history. Banning activities in much of the face-to-face economy, including restaurants, hotels, retail and air travel, which combined employ nearly 50 million people, will spill over into other sectors.

What has happened to the restaurant industry, for example, will dramatically affect the nation's beef producers. The ripple effect of this scenario plays out in all sorts of industries, like retailing and textiles. All that translates into a stunning 17% contraction in GDP in the second quarter, Vanguard estimates.


The hope is that this downturn will be relatively brief. "We assume that the need to significantly restrain activity, such as the closure of non-essential businesses, will dissipate by late in the second quarter," Davis writes.

But at present, uncertainty is pervasive. Before the coronavirus outbreak, Vanguard had assumed that GDP growth would markedly in 2020 to the 1.0% to 1.5% area. Now it's anyone guess as to how deep the recession and how strong the eventual rebound will be.