August 27, 2020 | Vanguard Perspective
Our ten-year, annualized, nominal return projections, as of June 30, 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||3.4%–5.4%||19.9%|
Global equities ex-U.S. (unhedged)
|Fixed income||Return projection||Median volatility|
|U.S. aggregate bonds||0.7%–1.7%||4.2%|
|U.S. Treasury bonds||0.3%–1.3%||4.2%|
|U.S. credit bonds||1.4%–2.4%||5.7%|
|U.S. high-yield corporate bonds||3.2%–4.2%||10.7%|
|U.S. Treasury inflation-protected securities||0.4%–1.4%||6.4%|
|Global bonds ex-U.S. (hedged)||0.5%–1.5%||2.5%|
|Emerging market sovereign||3.1%–4.1%||11.1%|
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 June 30, 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.
Recent data releases suggest that the initial stages of recovery in the United States, Europe, and the Asia-Pacific region are proceeding at a slightly faster pace than Vanguard had anticipated. However, as signs emerge of second waves of COVID-19 infection, we expect the pace of recovery to slow later in the year as localized lockdowns dampen activity and pent-up demand fades. The progression of COVID-19 and the prospects for a vaccine remain the key drivers of economic activity globally.
United States. GDP in the United States declined at a pace of –32.9% on an annualized basis in the second quarter, near the more optimistic end of our –30% to –40% estimate. Vanguard expects a more gradual recovery than consensus estimates amid continued virus transmission and consumer reluctance to engage in face-to-face activity.
Euro area. The euro area economy contracted by –12.1% in the second quarter compared with the first quarter, according to preliminary estimates.
China. Ahead of most of the world in the timetable of its recovery, China was affected by the virus and containment efforts first. Its GDP grew by a greater-than-expected 11.5% in the second quarter compared with the first quarter, having contracted by –10%.
Emerging markets. The International Monetary Fund foresees emerging markets contracting by –3.0% before rebounding to growth of 5.9% in 2021.
Given our expectation for a slow recovery in demand amid pandemic containment efforts, Vanguard continues to expect monetary policy to remain loose throughout 2020 and well into 2021, with risks skewed toward further easing.
The postponement on August 15 of a review of Phase One of the U.S.-China trade deal was met with a collective shrug. The cancellation attributed to scheduling difficulties, amid reports that China was struggling to meet required purchases of U.S. goods under the deal, removed for now the potential for disagreement on a topic that has roiled markets. Disagreements haven't gone away, however; in fact, they're piling up, with the most recent centered on Chinese-made apps and data collected from them in the United States.
The consumer price index in the United States rose 0.6% in July compared with June on a seasonally adjusted basis, the same rate of increase as registered in June, reflecting increased demand as pandemic restrictions eased. The rise was 1.0% compared with July 2019, higher than the 0.6% annual rise registered in June.
Vanguard expects pockets of COVID-19 outbreaks to produce a rolling recovery in U.S. unemployment in the medium term, with job losses possible in some months. Overall, we expect a gradual recovery in the number of employed people and a reduction in the unemployment rate by year’s end to a range of 8% to 10%.