Market perspectives: September 2019

Vanguard’s monthly economic and market update (8-minute read)

August 29, 2019


Key highlights

Even though the recent 2-year/10-year yield curve inversion spooked the markets, Vanguard doesn't expect a recession in the next 12 months.
As global growth continues to soften, all signs point to central banks lowering interest rates.
With U.S.-China trade tensions continuing, expect modest spillover to global trade.
The most attractive returns over the next 10 years may be abroad.

40% chance of a recession over the next 12 months

Recession watch, the markets, and the latest yield curve inversion

  • On August 14, the 2-year/10-year yield curve inverted for the first time since 2007.
  • Equity markets took notice, with the S&P 500 falling nearly 3%.
  • A global or major regional recession still is not our base case, but the risk is more elevated than normal.
  • If the yield curve doesn’t normalize after the September U.S. Federal Reserve meeting, Vanguard is poised to reassess its outlook for both a potential U.S. recession and the Fed's interest-rate target.

Downturns aren't rare events: Typical investors, in all markets, will endure many of them during their lifetime

Global stock prices, January 1, 1980, to December 31, 2018.

Global stock prices, January 1, 1980, to December 31, 2018.

One attention-grabbing downturn every two years:
12 corrections
Decline of 10% or more

8 bear markets
Decline of 20% or more, at least 2 months long

Source: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Both indexes are denominated in U.S. dollars.

Notes: Our count of corrections excludes those that turn into a bear market. We count corrections that occur after a bear market has recovered from its trough even if stock prices haven’t yet reached their previous peak.

Global growth will continue to soften

Softening global growth is expected to continue over the next 12 months

  • In the United States, with U.S.-China trade tensions still high, Vanguard sees growth slowing to 1.7% by year's end, with full-year 2019 growth closer to 2.0%.
  • In China, Vanguard still sees 2019 real GDP growth at 6.2%, but with risks to the downside. With China in a prolonged structural slowdown, we see growth further slowing to about 5.8% in 2020. We’re more bearish than the consensus given continued private-sector weakness and drags from U.S. tariff escalations.
  • In the euro area, Vanguard has lowered our 2019 forecast from 1.0% to 0.8% as manufacturing activity continues to contract. We now place a 35% to 40% probability on a euro area recession in the next 12 months.
  • And in emerging markets, we've downgraded our view on 2019 real GDP growth for a third consecutive month, from 4.4% to 4.1%. The revised outlook reflects downgrades for emerging Asia (from 6.3% to 6.2%) and Latin America (from 1.4% to 0.6%). Signs of slower growth in China have dampened emerging markets' industrial production and exports.

Another Fed rate cut in 2019?

All signs point to central banks lowering interest rates

  • We expect an additional cut from the Federal Reserve by year's end, with the magnitude dependent on the shape of the yield curve.
  • Amid slowing global economies and compounded by Brexit uncertainty, we now see the Bank of England cutting its bank rate from its current 0.75% by November.
  • We maintain our view that the European Central Bank will cut rates by up to 20 basis points and restart quantitative easing.

Trade tensions take a toll

U.S.-China trade developments are likely to continue to move markets

  • Recent trade moves between the U.S. and China have been squarely within Vanguard's baseline case of moderate tariff escalation and modest spillover to global trade.
  • But a sharp escalation in tariffs and concomitant spillovers to global trade represent the greatest downside risk to several of our economic projections.
  • Japan and South Korea have each announced plans to remove the other from their list of preferred trading partners, which Vanguard believes bears watching for its potential to disrupt product value chains throughout Asia.

Trade war impact on 2019 GDP

Trade war impact on 2019 GDP

Sources: Vanguard, using data from Bloomberg and St. Louis Federal Reserve.

Notes: Data as of March 31, 2019. Vanguard calculations, based on data from Thomson Reuters Datastream, Moody's Analytics Data Buffet, and the Federal Reserve Bank of New York.

Brexit uncertainty will continue

Brexit may be delayed again

  • Vanguard believes, that the government of new U.K. Prime Minister Boris Johnson will fail to secure concessions from the E.U., leading to a no-confidence vote in Parliament, a general election, and an extension of the October 31 withdrawal deadline.
  • In the longer term, we see as the most likely outcome the United Kingdom securing a withdrawal agreement and leaving the European Union, and in due course signing a free-trade agreement. But a range of other outcomes remains possible.
  • We expect Brexit-related uncertainties to persist into the new year, with a rebound in U.K. GDP in the quarters following an agreement.

Job growth is slowing

Unemployment rates in most major economies to slightly decline

  • Vanguard foresees the decline in employment growth continuing as labor slack—the labor market's ability to fill jobs—disappears and businesses curb hiring over heightened policy uncertainty and trade concerns.

Inflation targets remain elusive

The outlook on inflation is mixed, with weaker global growth offset by upward pressure from tariffs

  • In the U.S., Vanguard sees the Fed's favored inflation measure, the core Personal Consumption Expenditures Index, rising in the second half of 2019 but remaining below the Fed's 2% target.
  • In the euro area, we see core inflation remaining around 1% in the next 12 months, amid declining inflation expectations.
  • In China, Vanguard sees 2019 average inflation around 2.5%, with non-food inflation likely remaining stable around 2.0%.

The most attractive returns may be abroad

Asset class return outlooks

The 10-year return projections, based on market conditions as of March 31, 2019, are as follows:

Global equities ex-U.S. (unhedged)6.5%–8.5%
U.S. equities 3.5%–5.5%
U.S. real estate investment trusts2.5%–4.5%
U.S. bonds 2.0%–4.0%
U.S. Treasury bonds 1.5%–3.5%
Global bonds ex-U.S. (hedged) 1.5%–3.5%
U.S. credit bonds 2.5%–4.5%
U.S. high-yield corporate bonds 3.0%–5.0%
U.S. Treasury inflation-protected securities 1.0%–3.0%
U.S. cash1.5%–3.5%

These probabilistic return assumptions depend on current market conditions and, as such, may change over time.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of March 31, 2019.

Results from the model may vary with each use and over time.

Source: Vanguard Investment Strategy Group.

Want a pdf version of this article? Get it now.


  • All investing is subject to risk, including possible loss of principal.
  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
  • IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
  • The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
  • The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.


Our insights straight
to your inbox

Our insights straight to your inbox

Receive our latest Advisor's Digest
and commentary sent the
first business
morning every week.

A weekly digest of our latest research and commentary. Topics include the economy and markets, portfolio strategy, ETFs, and practice management.

Fund openings/closings, fund manager changes, dividend distributions, webinars, and other events you might want to know about.

Already registered? Log on to
manage your
email subscriptions.

Advisor's Digest

for September 16, 2019

Advisor's Digest for September 16, 2019

Advisor's Digest

for September 16, 2019