September 1, 2021 | Vanguard Perspective

Market perspectives: September 2021

Key highlights

  • We've downgraded our growth outlook for China, where the COVID-19 Delta variant has precipitated further lockdowns.
  • Vanguard believes the U.S. Federal Reserve will want to see further labor market gains in the months ahead before it starts paring its pace of asset purchases.
  • We see a number of forces aligning that should spur a strong upswing in U.S. employment in the coming months.
  • Vanguard believes that the Federal Reserve's preferred inflation measure (PCE) will remain above the Fed's 2% inflation target until the spring of 2022.

Asset class return outlooks

Our 10-year, annualized, nominal return projections, as of June 30, 2021, are shown below. Our outlooks for both equity and fixed income returns are, for the most part, marginally lower compared with our outlooks based on our previous running of the Vanguard Capital Markets Model®, on March 31, 2021. 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 2.3%–4.3% 16.7%
U.S. value 2.9%–4.9% 18.9%
U.S. growth –0.6%–1.4% 17.7%
U.S. large-cap 2.2%–4.2% 16.3%
U.S. small-cap 2.1%–4.1% 21.8%
U.S. real estate investment trusts 2.2%–4.2% 19.3%

Global equities ex-U.S. (unhedged)

5.1%–7.1% 18.7%
Fixed income Return projection Median volatility
U.S. aggregate bonds 1.3%–2.3% 4.5%
U.S. Treasury bonds 1.1%–2.1% 4.6%
U.S. credit bonds 1.5%–2.5% 4.6%
U.S. high-yield corporate bonds 1.9%–2.9% 10.4%
U.S. Treasury Inflation-Protected Securities 0.9%–1.9% 7.0%
U.S. cash 1.2%–2.2% 1.2%
Global bonds ex-U.S. (hedged) 1.2%–2.2% 3.8%
Emerging markets sovereign 1.9%–2.9% 10.2%
U.S. inflation 1.4%–2.4% 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 June 30, 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.

U.S economic growth holds up, while the outlook for China dips

United States

As formidable as the COVID-19 Delta variant appears to be, its effect on economic output in the United States so far has been minimal. Mobility data suggest activity may be leveling off, though not reversing, as case counts accelerate in some parts of the country. And even where vaccination rates are low, they're robust among those over age 65, who would otherwise most likely have the most adverse health outcomes.

  • We're watching the economy's resiliency closely, as U.S. output would need to hold around current levels to achieve full-year growth in our forecast range of 7.0% to 7.5%.
  • GDP increased at an annual rate of 6.5% in the second quarter, according to an advance estimate by the U.S. Bureau of Economic Analysis (BEA).

Euro area

Growth momentum remains strong, though high-frequency indicators suggest a modest softening in activity, particularly where cases of the COVID-19 Delta variant have risen.

  • Vanguard continues to expect growth in the third quarter to be slightly stronger than in the second, and that full-year growth could reach 5%.
  • GDP remains 3% below its pre-pandemic level, a gap that may be erased late this year.


Indicators of economic activity in China weakened in July, hit by the COVID-19 Delta variant, flooding in central China, and lagged effects of recent policy tightening. And given that much of the effect of the COVID-19-related lockdowns isn’t reflected in the July numbers, the worst may be yet to come in August.

  • Vanguard has downgraded its expectation for third-quarter GDP growth from 1.0% to 0.5%.
  • We anticipate China's full-year economic growth at just below 8.5%.

Emerging markets

Low COVID-19 vaccination levels have put any impulses toward accelerated growth in emerging markets on hold likely until late this year or early next year, when an anticipated ramp-up in vaccine production is likely to bolster supply.

  • Vanguard foresees full-year growth for emerging markets above 6%, with COVID-19 management playing an important role.
  • Countries that have had the most success in warding off COVID-19, notably in Asia, may be at greatest risk of having to initiate further restrictions on economic activity.

The Fed continues to hold the line on rates

The Federal Open Market Committee (FOMC) voted on July 28 to leave the target range for its federal funds rate unchanged at 0%–0.25% and its bond buying program unchanged. But Fed Chairman Jerome Powell acknowledged that the two components of the Fed’s dual mandate—price stability and maximum sustainable employment—have been “in tension” lately, with inflation having risen higher than the Fed had expected, but with further recovery still to come in the labor market.

  • Although the Fed sees inflation at recent levels as transitory, it sees risks as skewed to the upside.
  • Vanguard believes the Fed will want to see further labor market gains in the months ahead before it starts paring its pace of asset purchases—and we believe the Fed will indeed see those gains.

Watching inflation closely

The most recent Consumer Price Index (CPI) release in the United States was consistent with Vanguard's view that prices would begin to moderate after running high in recent months. Still, we're watching closely to determine whether recent higher inflation figures are likely to persist.

  • We believe that the core Personal Consumption Expenditures Index (PCE), the Federal Reserve's preferred inflation measure in considering interest rate targets, will remain above the Fed's 2% inflation target until the spring of 2022.
  • PCE differs from CPI in that it measures prices of a broader array of goods and can reweight expenditures as consumers substitute some goods and services for others. Core PCE and CPI exclude volatile food and energy prices.

The potency of commodities as an inflation hedge

Financial markets expect a certain level of inflation and factor it into the asset prices they set, a condition theoretically neutral for investment portfolios. Unexpected inflation, on the other hand, can erode portfolios’ purchasing power, a challenge especially for retirees.

  • Recent Vanguard research suggests that commodities stand apart as a vehicle for hedging against unexpected inflation.
  • Over the last three decades, commodities have had a statistically significant and largely consistent positive inflation beta, or predicted reaction to a unit of inflation.

Commodities’ inflation-hedging power has been strong and consistent

The graph shows the rolling 10-year beta to unexpected inflation of the Bloomberg Commodity Index, with beta holding fairly steady during the past 10 years, though increasing somewhat during the past two years.

Notes: The green line represents the rolling 10-year beta to unexpected inflation of the Bloomberg Commodity Index. The chart's shading reflects the significance of the inflation beta, with darker shades corresponding to greater significance. Inflation beta significance is a statistical measure determined by both the magnitude and volatility of the beta. Inflation beta with greater significance has a larger potential impact as a hedging mechanism.

Sources: Vanguard calculations, using data from Bloomberg and the University of Michigan Surveys of Consumers through March 31, 2021.

The stage is set for stronger job gains

We see a number of forces aligning that should spur a strong upswing in employment in the coming months and pave the way for a full labor-market recovery by mid-2022.

  • Several factors contribute to our optimistic outlook. Vaccination rates by September should near their peak. Schools are set to reopen with in-person classes, making more stay-at-home parents available to take jobs.
  • There's the looming expiration of enhanced unemployment benefits and CARES Act unemployment coverage for workers not traditionally covered by unemployment insurance.
  • Vanguard expects monthly job gains to average around 650,000 for the rest of the year, and for the unemployment rate, currently at 5.4%, to fall toward the mid-4.0% range by year-end.


  • 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.