The high probability of reversion to mean is “sowing the seeds” for a reversal in favor of value. Vanguard expects long-term inflation to “normalize” around 2%, while both real interest and post-Covid 19 corporate profits increase and the recovery gains steam.
Were long-term inflation and real interest rate levels to overshoot their historical levels to exceed Vanguard’s targets of 2.5% and 3.25%, respectively, value could do extremely well. Conversely, if the recovery were to “stall meaningfully,” the asset manager concedes growth could continue to outperform.
Right now, the recovery appears to be accelerating. Vanguard sees a value tilt as something of a hedge against the likelihood of a “lower-return environment over the next decade” and “possible negative returns in the growth portion” of the stock market.