Market perspectives
Vanguard Perspective
|April 23, 2024
Vanguard Perspective
|April 23, 2024
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of April 17, 2024.
Recent CPI data underscores the Fed’s challenge of easing inflation to their 2.0% target.
We foresee U.S. economic growth around 2.0% in 2024, higher than our initial estimate of 0.5%.
In China we expect supply-and-demand imbalances to add to deflationary pressure.
Projected returns
Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the December 31, 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 |
4.3%–6.3% |
19.1% |
U.S. growth |
0.9%–2.9% |
18.1% |
U.S. large-cap |
3.7%–5.7% |
16.7% |
U.S. small-cap |
4.3%–6.3% |
22.4% |
U.S. real estate investment trusts |
4.1%–6.1% |
20.1% |
Global equities ex-U.S. (unhedged) |
6.9%–8.9% |
18.3% |
Global ex-U.S. developed markets equities (unhedged) |
6.9%–8.9% |
16.7% |
Emerging markets equities (unhedged) |
6.1%–8.1% |
26.1% |
|
|
|
Fixed income |
Return projection |
Median volatility |
U.S. aggregate bonds |
3.9%–4.9% |
5.6% |
U.S. Treasury bonds |
3.6%–4.6% |
5.9% |
U.S. intermediate credit bonds |
4.4%–5.4% |
5.2% |
U.S. high-yield corporate bonds |
5.2%–6.2% |
10.0% |
U.S. Treasury Inflation-Protected Securities |
3.0%–4.0% |
5.1% |
U.S. cash |
3.4%–4.4% |
1.4% |
Global bonds ex-U.S. (hedged) |
3.9%–4.9% |
4.3% |
Emerging markets sovereign bonds |
5.4%–6.4% |
10.2% |
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 December 31, 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
The latest inflation and labor market data imply that U.S. production of goods and services remains healthy and underscore our view that continued economic strength might prevent the Federal Reserve from cutting interest rates in 2024.
U.S. Consumer Price Index (CPI) data for March underscore the challenge faced by Federal Reserve policymakers as they try to guide inflation down toward their 2.0% target. Getting there would require a slower pace of growth for two especially sticky CPI components—shelter and services excluding shelter. Without progress on those fronts, the Fed may not be able to cut its benchmark interest rate target.
Price increases for services excluding shelter have accelerated since December, propelled by a tight labor market and strong wage growth. Meanwhile, a year-long slowdown in the pace of shelter inflation has not been sharp enough to comfort the Fed. “Shelter inflation is critical to core inflation reaching the Fed’s target,” said Ryan Zalla, a Vanguard economist who studies price behavior. “If shelter inflation were to return to its prepandemic average of around 2.5%, core CPI would be approximately 2.0%.”
Stubborn shelter prices reflect heightened housing demand, supported by a strong labor market, and low supply, abetted by the reluctance of many homeowners to give up low mortgage rates by moving. “For shelter inflation to moderate, labor market conditions will have to materially weaken, or housing supply will have to increase,” Zalla said. “Meaningful changes in either appear unlikely to materialize soon.”
Europe
Speaking on April 11, European Central Bank (ECB) President Christine Lagarde emphasized that the ECB would be “data-dependent, not Fed-dependent” in considering the appropriate policy rate. Her reference was to the risk that, by maintaining its current rate target for an extended period, the U.S. Federal Reserve could spur other central banks to leave their rate targets higher than they otherwise might. Cross-border gaps in policy rates can put downward pressure on currencies where rates are lower, increasing inflation risk.
United Kingdom
A continued moderation in wage growth and encouraging inflation news could set the stage for policy interest rate cuts this summer. Growth in average regular pay, which excludes bonuses, slowed to 6.0% between December and February, a sixth consecutive moderation in the rolling, three-month measure.
China
China’s economy appeared to have made a solid start to 2024. But already questions have arisen about the sustainability of its growth after the second quarter, when year-over-year comparisons will be relatively easy.
Emerging markets
Amid continued strength in the U.S. economy, we have upgraded our 2024 GDP growth forecast for Mexico. U.S. demand for Mexican goods has remained strong, and domestic wages and consumption are holding up. Our revised forecast is for 1.75%–2.25% growth, up from 1.5%–2.0% but still below trend amid restrictive monetary policy.
For more expert insights, check out:
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.