Vanguard’s message to investors, some who are experiencing the shock and awe of a retreating stock market for the first time, is: Buckle up.
After more than a decade of record returns, Vanguard cautioned that subdued returns are likely to continue for the next 10 years, with U.S. stocks returning just 3.4% to 5.4% annually.
“Stock and bond markets have been hit hard so far in 2022,” the Malvern, Pa.-based investment advisor that manages more than $7 trillion said in its new midyear 2022 update.
Vanguard’s latest 10-year annualized return forecast for international stocks is 6.1% to 8.1%, for U.S. bonds it is 3% to 4% and for international bonds (hedged in U.S. dollars) it is 2.9% to 3.9%.
A lot has changed since the start of the year, when it expected global economies to continue to recover from the effects of the Covid-19 pandemic, but at a more modest pace than in 2021, the firm said.
Unfortunately, the expected pace of change in macroeconomic fundamentals such as inflation, growth, and monetary policy “has failed to live up to expectations. ... As a result central banks have been forced to play catchup in the fight against inflation, ratcheting up interest rates more rapidly and possibly higher than previously expected,” the report said.
But those actions, which are designed to halt inflation, risk cooling economies to the point that they enter recession, according to Vanguard Senior International Economist Andrew Patterson.
“Global economic growth will likely stay positive this year, but some economies are flirting with recession, if not this year, then in 2023,” Patterson said, noting that Vanguard has downgraded its 2022 GDP growth forecasts for all major regions, increased its inflation forecast and become more hawkish about monetary policy.
“We have downgraded expected U.S. GDP growth from about 3.5% at the start of the year to about 1.5%. The factors that led to our downgrade will likely continue through 2022—namely, tightening financial conditions, wages not keeping up with inflation, and lack of demand for U.S. exports.”
Vanguard assesses the probability of a U.S. recession at about 25% over the next 12 months and 65% over 24 months.
“We believe that a period of high inflation and stagnating growth is more likely than an economic 'soft landing' of growth and unemployment rates around or above longer-term equilibrium levels (about 2% for growth and 4% for unemployment),” the firm said.
Vanguard expects China to fall far short of policymakers’ growth target of about 5.5% because of the difficulties the superpower is having balancing its zero-Covid policy with economic stability and growth.