February 26, 2021 | Vanguard Perspective
Our 10-year, annualized, nominal return projections, as of December 31, 2020, are shown below. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.
|Equities||Return projection||Median volatility|
|U.S. real estate investment trusts||3.0%–5.0%||19.6%|
Global equities ex-U.S. (unhedged)
|Fixed income||Return projection||Median volatility|
|U.S. aggregate bonds||0.8%–1.8%||4.2%|
|U.S. Treasury bonds||0.5%–1.5%||4.4%|
|U.S. credit bonds||1.2%–2.2%||5.7%|
|U.S. high-yield corporate bonds||1.9%–2.9%||10.1%|
|U.S. Treasury Inflation-Protected Securities||0.5%–1.5%||6.3%|
|Global bonds ex-U.S. (hedged)||0.6%–1.6%||2.5%|
|Emerging markets sovereign||1.5%–2.5%||10.5%|
These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
IMPORTANT: The projections or 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 December 31, 2020. Results from the model may vary with each use and over time. For more information, see the Notes section.
Source: Vanguard Investment Strategy Group.
Vanguard believes that the current pace of vaccination (a one-week average of 1.61 million per day as of February 17, according to Bloomberg) supports our view that economic activity in the United States will pick up significantly in the second half of the year.
We believe that initial distribution bottlenecks—attributable in no small part to stockpiling scarce supply to ensure second doses—are surmountable. A change in strategy that prioritizes first doses and increased vaccine production should ensure that the pace of vaccinations accelerates.
Our estimate for U.S. GDP growth above 5% in 2021 doesn’t yet officially account for further government fiscal support while we await specifics on the size, timing, and composition of support.
We would expect to raise our full-year U.S. GDP growth estimate to the neighborhood of 6.5% if further fiscal support is forthcoming, including direct aid to households and aid to state and local governments for health-related efforts.
Vanguard anticipates a decline in GDP in the first quarter, suggesting the region will slip into a technical "double-dip" recession.
In our base case we continue to foresee economic growth accelerating in the region later in the year, leaving in place our expectation for full-year growth around 5% and a return to a pre- pandemic GDP level by the end of the year.
Recent COVID-19 outbreaks and regional lockdowns are likely to leave GDP growth in China below potential in the first quarter. But we expect the fall in consumption demand to quickly recover in the second quarter, with the offsetting effects leaving our full-year outlook for China’s growth unchanged around 9.0%.
China, whose fourth-quarter GDP growth came in at 6.5% compared with the year-earlier quarter, higher than consensus estimates, also becomes the first major economy to reach its pre-pandemic trend.
Vaccine breakthroughs and rollouts in developed economies make Vanguard optimistic that emerging markets on aggregate will grow by more than the 6% outlook we communicated at the end of 2020.
We continue to see emerging Asia lead the way, with 2021 growth above 8%, as the region’s pandemic management bears fruit. The growth story will also likely be positive for the Middle East should energy prices remain strong.
Vanguard sees the Federal Reserve keeping its policy rate on hold at least through 2022 absent a shift in health outcomes affecting consumer and business behavior.
Vanguard expects the core personal consumption expenditures price index (PCE) to be pushed above the Fed’s 2% target in the first half of the year as comparisons are made to weak year-earlier numbers and amid service sector supply constraints as economic activity picks up.
We don’t foresee a sustained inflationary trend in the United States given structural forces, and we expect direct effects from a baseline $1 trillion government fiscal package to have a minimal effect on core PCE.
The unemployment rate in the United States fell in January, but don’t place too much emphasis on the official unemployment rate in the first half of 2021.
Another in the Bureau of Labor Statistics range of alternative unemployment measures, the U-6 unemployment rate, more broadly captures an underutilization of labor, including part-time workers who would prefer full-time work and discouraged individuals who have temporarily left the workforce.