March 1, 2022 | Expert Perspective

Market perspectives: March 2022

Key highlights

  • Following the economic effects of the Omicron variant, we have downgraded our full-year 2022 U.S. growth from around 4.0% to around 3.5%.
  • More important than the number of hikes in 2022 is the Fed’s eventual terminal rate, which Vanguard believes will need to be around 3%.
  • In our base case, Vanguard foresees inflation peaking in the first half of 2022, though we expect core inflation to persist above 3% through 2022.

Asset-class return outlooks

Our 10-year, annualized, nominal return projections, as of December 31, 2021, 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. equities 2.0%–4.0% 16.6%
U.S. value 2.8%–4.8% 19.0%
U.S. growth –1.2%–0.8% 17.5%
U.S. large-cap 1.9%–3.9% 16.3%
U.S. small-cap 2.3%–4.3% 22.5%
U.S. real estate investment trusts 1.8%–3.8% 19.2%
Global equities ex-U.S. (unhedged) 5.1%–7.1% 18.2%
Global ex-U.S. developed markets equities (unhedged) 5.1%–7.1% 16.3%
Emerging markets equities (unhedged) 4.3%–6.3% 26.8%
Fixed income Return projection Median volatility
U.S. aggregate bonds 1.5%–2.5%  4.4%
U.S. Treasury bonds 1.2%–2.2%  4.6%
U.S. credit bonds 1.8%–2.8%  4.5%
U.S. high-yield corporate bonds 2.3%–3.3% 10.3%
U.S. Treasury Inflation-Protected Securities 1.2%–2.2%  4.6%
U.S. cash 1.2%–2.2%  1.1%
Global bonds ex-U.S. (hedged) 1.3%–2.3%  3.7%
Emerging markets sovereign 2.5%–3.5% 10.5%
U.S. inflation 1.6%–2.6%  2.3%

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, 2021. Results from the model may vary with each use and over time. For more information, see the Notes section.

Source: Vanguard Investment Strategy Group.

Region-by-region outlook

United States

The economic effects of the COVID-19 Omicron variant are likely to be short-lived, but they’re significant enough to lead us to downgrade our full-year 2022 growth outlook for the United States from around 4.0% to around 3.5%. Some, but not all, of the Omicron-related lost output in the first quarter is likely to be recovered in the second quarter.

  • The growth outlook remains strong even after factoring in the expected pace of Federal Reserve rate hikes, with the labor market providing ample evidence of strength.
  • Real gross domestic product (GDP) for all of 2021 grew by 5.7%, compared with a contraction of 3.4% in 2020, when the pandemic set in.

Euro area

Vanguard has downgraded its forecast for full-year 2022 GDP growth in the euro area, from around 4.0% to around 3.5%, as higher than expected energy prices weigh on household spending.

  • We expect a likely drag on first-quarter GDP growth from the COVID-19 Omicron variant to be made up in the second quarter.The recent surge in daily virus cases to more than 2,000 per million is likely to continue to weigh on growth in the first quarter of 2022.
  • Omicron should have a negligible effect on full-year growth.


Vanguard continues to foresee GDP growth in China around 5% for full-year 2022, with weak first-quarter growth followed by a second-quarter rebound.

  • We expect party meetings in March to deliver much-needed policy certainty. We see stimulus as likely being front-loaded.
  • We foresee a return to trend growth in 2023 with the easing of major headwinds.

Emerging markets

Monetary policy tightening to contain inflation is likely to continue to constrain growth in emerging markets in 2022, albeit to around trend levels. We foresee 2022 emerging markets growth around 5.5%.

  • Latin America and Central Europe face stagflationary scenarios.
  • Brazil narrowly averted a "technical recession" with 0.1% growth in the fourth quarter.

Market spotlight

With geopolitical tensions such as what we’re seeing in Russia and Ukraine, investors often ask whether a link exists between current events and financial markets’ performance. However, when we examine previous geopolitical events from the past 60 years, we find that while equity markets may react negatively to the initial news, geopolitical sell-offs are typically short-lived and returns over the following 12-month period are largely in line with long-term average returns.

Geopolitical sell-offs are typically short-lived

Notes: Returns are based on the Dow Jones Industrial Average through 1963 and the Standard & Poor’s 500 Index thereafter. All returns are price returns. Not shown in the above charts, but included in the averages, are returns after the following events: the Suez Crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), shah of Iran’s exile (1979), U.S. invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1991), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), multi-force intervention in Libya (2011), and U.S. anti-ISIS intervention in Syria (2014).

Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

All investments are subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.


How much will the Fed raise rates in March?

A Federal Reserve rate-hike cycle appears imminent, with debate having moved from not whether the Fed will raise the target range for its federal funds rate at its March 15–16 policy meeting, but by how much (either 25 or 50 basis points).

  • Vanguard believes the Fed will continue to be data-dependent in determining the timing and pace of rate hikes, and that more important than the number of hikes in 2022 is the Fed’s eventual terminal rate, which we believe will need to be around 3%.
  • The Federal Open Market Committee voted January 26 to leave the target range for its federal funds rate unchanged at 0% to 0.25% but said a rate hike would be appropriate "soon."
  • The Fed said it remained on track to end its government bond purchases in March and communicated a set of principles for reducing the size of its balance sheet.
  • Chairman Jerome Powell said that with inflation that continues to trend higher than expected and with labor demand outstripping supply, both elements of the Fed’s dual congressional mandate of ensuring price stability and maximum sustainable employment had met the conditions for a rate hike.

Inflation should peak in the first half of 2022

The Consumer Price Index in the United States rose by 7.5% in January compared with January 2021, the largest such increase in 40 years. The gauge rose by 0.6% on a seasonally adjusted basis in January compared with December, greater than the previous month's 0.5% increase, driven by rises in food, electricity, and shelter prices.

  • In our base case, we foresee inflation peaking in the first half of 2022, though we expect core inflation, which excludes volatile food and energy prices, to persist above 3% through 2022.
  • Separately, the core Personal Consumption Expenditures Price Index (PCE), the Federal Reserve’s preferred inflation indicator in considering monetary policy, rose 0.5% in December.
  • The Bureau of Labor Statistics’ Employment Cost Index showed strong rises in civilian workers’ total compensation costs (4.0% compared with a year earlier).

Labor market stays strong

Despite prevalence of the COVID-19 Omicron variant, the labor market continued to be strong in the United States in January.

  • The Bureau of Labor Statistics (BLS) reported that 467,000 jobs were created in January and that the unemployment rate had ticked up to 4.0% from 3.9% in December.
  • The unemployment rate rose as additions to the labor force (in part reflective of annual BLS population adjustments) outpaced job creation.
  • Vanguard continues to foresee the unemployment rate fall below its pre-pandemic level.


  • All investing is subject to risk, including possible loss of principal.
  • Diversification does not ensure a profit or protect against loss.
  • 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.
  • Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
  • 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.