Market perspectives
Vanguard Perspective
|November 27, 2023
Vanguard Perspective
|November 27, 2023
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of November 15, 2023.
Our full-year 2023 economic growth forecast has increased to 2.5%.
The near-term bar for additional rate increases remains high.
Recent economic data suggests China’s economy is gaining momentum.
Projected returns
Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the June 30, 2023, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.
Equities |
Return projection |
Median volatility |
U.S. equities |
4.2%–6.2% |
17.0% |
U.S. value |
4.8%–6.8% |
19.2% |
U.S. growth |
1.2%–3.2% |
18.3% |
U.S. large-cap |
4.2%–6.2% |
16.8% |
U.S. small-cap |
4.9%–6.9% |
22.2% |
U.S. real estate investment trusts |
4.6%–6.6% |
20.5% |
Global equities ex-U.S. (unhedged) |
7.1%–9.1% |
18.0% |
Global ex-U.S. developed markets equities (unhedged) |
7.0%–9.0% |
16.7% |
Emerging markets equities (unhedged) |
6.6%–8.6% |
26.2% |
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Fixed income |
Return projection |
Median volatility |
U.S. aggregate bonds |
4.8%–5.8% |
5.6% |
U.S. Treasury bonds |
4.4%–5.4% |
5.9% |
U.S. intermediate credit bonds |
5.3%–6.3% |
5.3% |
U.S. high-yield corporate bonds |
6.4%–7.4% |
10.0% |
U.S. Treasury Inflation-Protected Securities |
3.7%–4.7% |
5.2% |
U.S. cash |
4.1%–5.1% |
1.4% |
Global bonds ex-U.S. (hedged) |
4.7%–5.7% |
4.4% |
Emerging markets sovereign bonds |
6.5%–7.5% |
10.3% |
U.S. inflation |
2.0%–3.0% |
2.3% |
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
Source: Vanguard Investment Strategy Group.
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 September 30, 2023. Results from the model may vary with each use and over time. For more information, see the Notes section at the end of this article.
United States
Robust economic output in the third quarter and a lack of indications that consumption has moderated yet in the fourth have led us to increase our forecast for full-year 2023 economic growth, to 2.5% in real (inflation-adjusted) terms. Between June and August, the Federal Reserve’s preferred inflation gauge rose at an annualized rate of 2.16%. It was the lowest such reading of the core Personal Consumption Expenditures (PCE) index, which excludes volatile food and energy prices, since early 2021. Continued deceleration in the core PCE would increase the likelihood of the Fed reaching its 2% inflation target in 2024.
The effect of higher central-bank interest rate targets is likely to send the U.S. economy into a mild recession in 2024 but also should help to further curb inflation and, in the second half of the year, allow the Federal Reserve to cut its policy rate. At the end of their cutting cycles, however, the rate targets of the Fed and other developed-market central banks are likely to be higher than we’ve grown accustomed to in recent years.
Notes: The chart shows actual central bank policy rates for January 2005 through October 2023 and Vanguard rate forecasts thereafter through December 2025.
Sources: Bloomberg (for historical data) and Vanguard (forecasts).
“The transition to a higher-interest-rate environment isn’t complete, and financial market volatility is likely to remain elevated in the near term,” said Andrew Patterson, Vanguard senior international economist. “But it will usher in a return to sound money that will endure beyond the next business cycle and serve long-term investors well.”
Europe
Signs of subdued economic activity continue, allowing the European Central Bank (ECB) to leave its deposit facility rate unchanged at 4% on October 26, its first pause after 10 consecutive rate increases. We maintain our view that the ECB will maintain that rate at least until the second half of 2024.
United Kingdom
Restrictive monetary policy is showing its effects through stalled economic growth and a slowdown in the labor market. But stickier-than-expected wage growth that has kept services inflation too high reinforces our view that policy interest rates will remain at their peak well into 2024.
China
A mixed picture of economic data released November 15 suggests China’s economy is gaining momentum after recent government stimulus. Retail sales increased by 7.6% year-over-year in October, the National Bureau of Statistics reported, far stronger than 5.5% growth in September and above consensus estimates. Industrial production remained resilient, but fixed asset investment moderated, weighed upon by a sluggish property sector.
Emerging Markets
Interest rate cuts in Brazil and Chile foreshadow our views for emerging market economies in 2024. Emerging markets were quicker than developed markets to raise interest rates in the face of soaring inflation. We expect Latin America and emerging Europe to cut rates modestly through 2024 as restrictive monetary policy raises concerns about growth. We expect central banks in emerging Asia to remain on hold longer.
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Notes:
All investing is subject to risk, including the possible loss of the money you invest.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks and 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 (VCMM) 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.