In its midyear forecast, Vanguard, the world’s largest issuer of mutual funds and second-largest issuer of exchange-traded funds (ETFs), said it still expects a recession in the U.S. and most other economies.

“Generationally high inflation has led to the most rapid monetary tightening in generations,” explained Andrew Patterson, the firm’s senior international economist, and Kevin DiCiurcio, head of development for the Vanguard Capital Markets Model, in an email. “Central banks will ultimately succeed in their fight against inflation, but at a cost of recession in many economies.”

As for whether the recession will be a hard or soft landing, the Vanguard executives didn’t sound too worried. But unlike some forecasters who believe that a rolling recession in 2022 has turned into a rolling recovery, it was unwilling to argue that the U.S. economy has dodged the recession bullet.

“Given the relative strength in the labor market and in consumer and business balance sheets, we believe any recession is likely to be shallow in nature and likely a few quarters in duration,” they said. “Something more similar to the U.S. experience in 2001 rather than a deeper and more protracted downturn.”

The Valley Forge, Pa.-based investment giant, with some $7.7 trillion in global assets under management as of April 2023, also explained that its asset-allocation model indicated bonds should dominate portfolios for the intermediate term. This, said DiCiurcio and Patterson, is “mostly related to the expected equity risk premium from our forecasting models.”

With the high bond yields we have today, and U.S. equities up roughly 17% year-to-date as measured by the S&P 500, they continued, there is a “low benefit of taking on additional equity risk.”

Their economic model, based on a “time-varying asset allocation methodology,” is intended to maximize expected portfolio returns over a period of time. The model “can help an investor who, for example, targets a certain level of return or portfolio payout to fund a required level of spending,” the press release said.

This is not, however, set in stone. “Achieving a target payout through changing market conditions may require adjusting the asset allocation over time,” the press release acknowledged.

Finally, Vanguard noted that, so far this year, “equity markets around the world generally have rallied strongly—with the notable exception of China, the dominant emerging market.”

In the statement, DiCiurcio said, “Corporate profits have mostly fallen in the last several months. But investors anticipated greater profit declines. It appears that hopes of a soft economic landing—a deceleration that does not end in recession but helps to tame inflation—have made investors comfortable with higher equity valuations.”

Nevertheless, widening differences in interest rates between the U.K. and U.S. improve the outlook for most global equities and bonds, said the Vanguard team.

“This is related to our existing currency model,” explained Patterson and DiCiurcio, by email.

The difference in interest rates between the two countries should equal the relative change in their currency exchange rates. So as U.S. rates rise faster than their UK counterparts, the differential in rates and currencies widens.

“If U.S. differentials are widening,” they said, “we expect more dollar depreciation, which is good for International investments.”