Market perspectives
Vanguard Perspective
|August 23, 2023
Vanguard Perspective
|August 23, 2023
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of August 17, 2023.
We’ve increased our forecasts for the Federal Reserve’s federal funds rate target and for 2023 headline and core inflation and GDP.
We’ve lowered our forecasts for 2023 and 2024 year-end unemployment rates.
We’ve decreased our recession probability estimate to 70% over the next 18 months from more than 90%, pushing our base-case recession timeline from 2023 to 2024.
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 |
3.7%–5.7% |
17.0% |
U.S. value |
4.6%–6.6% |
19.3% |
U.S. growth |
0.8%–2.8% |
18.2% |
U.S. large-cap |
3.7%–5.7% |
16.7% |
U.S. small-cap |
4.3%–6.3% |
22.5% |
U.S. real estate investment trusts |
4.2%–6.2% |
20.0% |
Global equities ex-U.S. (unhedged) |
6.4%–8.4% |
18.2% |
Global ex-U.S. developed markets equities (unhedged) |
6.1%–8.1% |
16.5% |
Emerging markets equities (unhedged) |
6.2%–8.2% |
26.2% |
Fixed income |
Return projection |
Median volatility |
U.S. aggregate bonds |
4.0%–5.0% |
5.6% |
U.S. Treasury bonds |
3.6%–4.6% |
5.9% |
U.S. intermediate credit bonds |
4.5%–5.5% |
5.2% |
U.S. high-yield corporate bonds |
5.7%–6.7% |
9.9% |
U.S. Treasury Inflation-Protected Securities |
3.0%–4.0% |
5.1% |
U.S. cash |
3.3%–4.3% |
1.5% |
Global bonds ex-U.S. (hedged) |
4.0%–5.0% |
4.4% |
Emerging markets sovereign bonds |
5.6%–6.6% |
10.3% |
U.S. inflation |
1.9%–2.9% |
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 June 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
Amid continued resilience in the labor market and the broader economy, we’ve revised our forecasts for key economic indicators and the policy interest rate.
A funny thing has happened in the U.S. labor market since the ratio of job vacancies to unemployment (V/U) started to fall early this year: The pace of monthly wage growth has accelerated. Typically, a declining V/U—a sign of labor market softening—is accompanied by slowing wage growth. Intuitively, wage growth should ease as demand for workers falls. That it hasn’t is a function of lingering post-COVID-19 dynamics, said Adam Schickling, a Vanguard economist who studies the U.S. labor market.
“There are two key reasons for this phenomenon,” Schickling said. “Sectors remain where demand for labor well exceeds supply, such as health care, professional services, and leisure and hospitality. And firms have been reluctant to fire or lay off workers given the challenging labor supply environment.” Schickling also noted that real (after-inflation) unit labor costs are below pre-COVID-19 levels for many sectors, providing room for wages to rise further without immediately spurring inflation.
Notes: Wage changes are nominal and measured on a monthly seasonally adjusted annualized basis. Years depicted reflect periods of labor market softening as measured by a declining ratio of job vacancies to unemployment. A ratio of 1:1 suggests a labor market in balance. The ratio as of May 31, 2023, was 1.6:1. The data representation for 2023 includes actual data and the trend line. Data representations for past years include only trend lines to aid readability.
Sources: Vanguard analysis of data from the U.S. Bureau of Labor Statistics and Refinitiv Datastream through May 31, 2023.
The findings are part of the backdrop for changes to Vanguard’s U.S. economic and monetary policy forecasts. As more workers find jobs and earn more, better-positioned consumers will support growth, pricing power, and interest rates.
Europe
The euro area didn’t fall into recession early this year after all, according to revised GDP figures showing that growth was flat in the first quarter. The narrative of economic weakness doesn’t change, however.
United Kingdom
Recent inflation data emphasize the U.K. economy’s challenges. Continued strong inflationary pressures suggest that the Bank of England isn’t yet in position to halt the interest rate increases that began in December 2021 and now total more than 5 percentage points. We expect a rising policy rate to weaken demand and eventually weigh on the labor market.
China
The post-COVID-19 economic recovery that took hold in the first quarter of 2023 is being challenged from all sides. “The deceleration in economic activity in July was broad-based,” said Grant Feng, a Vanguard senior economist. “It reflects a deepening property slump, subdued investment demand, waning consumption, and weakened external sector momentum.”
Emerging Markets
Aggressive monetary policy tightening has taken hold in some emerging markets, bringing inflation down sufficiently to allow for the start of rate cuts. “We would expect emerging markets that raised rates the most to also cut them the most, though the path and timing of cuts could differ among nations and from trajectories when central banks were raising rates,” said Vytas Maciulis, a Vanguard economist.
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