Vanguard’s economic and market outlook for 2024

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Vanguard’s economic and market outlook for 2024

Expert Perspective


December 14, 2023

Our economic and market outlook for 2024 reflects the house view of Vanguard’s global economics and markets teams as of December 12, 2023.

A return to sound money. It’s a theme we at Vanguard have been communicating for more than a year, and in 2024 we believe that the greater investing world will come around to its implications.

Sound money is the result when interest rates are above the rate of inflation, a development we expect to persist in the years ahead. For well-diversified investors, the permanence of higher real interest rates provides a solid foundation for long-term risk-adjusted returns.

Why investors benefit from a return to sound money

Interest rates may moderate from recent peaks, but they will likely stay elevated in the years ahead. In this video, Joe Davis, Vanguard’s global chief economist, puts the return to sound money into the context of our recent and atypical low-rate environment—and explains why the development is so positive.

Voices from various news clips: Inflation is high. It hasn’t broken. The pound in your pocket is buying less and less. … transitory, now it’s terrible. Interest rates are set to rise further. Question is how far should they go?

Narrator: The high inflation and interest rates of the last two years may seem unusual … but we’ve been here before.

Voice from archival news clips: Prices began to rise. You had to pay more for food and clothing.

Narrator: High inflation followed by high interest rates … several times.

Joe Davis: I remember being in the back of my parents’ station wagon. It was the mid-1970s. I remember my mom waiting in line for a long time. Turns out we were waiting in the gas lines. Fuel was being rationed. I was a child, didn’t know what inflation was, but I do know I had to wait a long period of time and my parents struggled during that period.

Narrator: Since the 2008 global financial crisis and through the COVID-19 pandemic, low interest rates drove equity valuations to unsustainable highs and bond yields to unfathomable lows.

Joe Davis: When you have a low interest rate environment, that is code word for saying long, expected future returns are going to be low, because you don’t have the power of compounding that a higher interest rate would give you that would be a tailwind for your portfolio.

Narrator: Supply and demand disruptions, particularly in goods and labor markets, sparked generationally high inflation as economies recovered from pandemic shocks. To fight that inflation, developed markets’ central banks have been raising short-term interest rates. The inflation fight isn’t over, but we’re confident it will be won. As inflation falls to central bank targets, we expect to see cyclical interest rates moderate from recent peaks, though not to the lows we’ve recently become accustomed to.

Joe Davis: We’ve not only been here before, we’ve been in this sort of environment more times than not over the past three centuries of market history. And so, I think history will show, and our view has been, that the past 10 years were the exception, not the norm.

Narrator: Vanguard believes that structural interest rates will stay elevated for years to come. We estimate neutral rates are higher than they’ve been recently. The neutral rate is a theoretical equilibrium policy rate that would neither stimulate nor restrict an economy. By our estimate, the real neutral rate, which is adjusted for inflation, has settled roughly a percentage point higher than what it was in the years after the global financial crisis. A higher-rate environment has far-reaching implications for the economy and markets.

Joe Davis: Emphatically, bonds are back. A fixed income portfolio has a high probability of outperforming the rate of inflation, whatever that should be, over the next decade. Implications for equities, it’s a mixed assessment. Longer term, like any investment, it’s positive because you have higher expected returns, because you’re compounding that higher interest rate right in your portfolio. The one caveat is when you have a higher interest rate environment, it means that stock markets, all else equal, are a little bit more expensive today than they otherwise would be. So, in other words, it’s saying there’s no pain, no gain.

Narrator: Higher interest rates may be bad news for borrowers, but they’re good news for savers and diversified investors. It’s the return of sound money.

Joe Davis: Sound money is when we have interest rates that are above the rate of inflation. That’s been the average historically, hasn’t been the case for the past 15 years … which is why the return to sound money is, I would argue, the single best financial market development over the past two decades.

Looking beyond a likely slowdown in 2024

Vanguard anticipates that the United States and other developed markets will grapple with mild recessions in coming quarters and that central banks will cut interest rates, likely in the second half of 2024, amid growth challenges and inflation falling toward the banks’ targets.

But what happens on the other side of such an economic reset? “We believe that interest rates will remain above the rate of inflation,” said Andrew Patterson, Vanguard senior international economist. “The days of ultra-low interest rates are over, and we have greater conviction in this view than we did just a year ago.”

In the U.S. especially, drivers of this shift include aging populations and relatedly rising fiscal deficits. As government borrowing needs increase and the working-age population of savers shrinks, structural interest rates will naturally rise. Anticipated shortfalls of workers would only add to the challenge.

There’s also a potential positive driver of higher structural interest rates related to productivity, Patterson said. “Advances in artificial intelligence and automation could offset demographic headwinds by increasing productivity, which in turn would increase demand for capital and drive up interest rates.

“We hope the good reasons for higher structural interest rates outweigh the bad ones,” Patterson said. “Either way, we believe that an era of sound money, where savers earn positive real returns and borrowers need to carefully weigh capital costs, is with us for the foreseeable future.”

Global equity and fixed income outlook

Our 10-year annualized return forecasts for both equities and fixed income are significantly higher than at year-end 2021, before central banks broadly began raising interest rates to combat inflation.

10-year projected returns

U.S. equities have projected returns of 2.0%-4.0% for 2021 year-end, 4.4%-6.4% for 2022 year-end, and 4.2%-6.2% for 2023 as of September 30. Global equities ex-U.S. (unhedged) have projected returns of 5.1%-7.1% for 2021 year-end, 6.7%-8.7% for 2022 year-end, and 7.1%-9.1% for 2023 as of September 30. U.S. aggregate bonds  have projected returns of 1.5%-2.5% for 2021 year-end, 4.0%-5.0% for 2022 year-end, and 4.8%-5.8% for 2023 as of September 30. Global bonds ex-U.S. (hedged) have projected returns of 1.3%-2.3% for 2021 year-end, 3.9%-4.9% for 2022 year-end, and 4.7%-5.7% for 2023 as of September 30.


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. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of December 31, 2021; December 31, 2022; and September 30, 2023. Results from the model may vary with each use and over time. For more information, please see the Notes section.

Note: Figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income.

Source: Vanguard.


Vanguard economic and market outlook for 2024: A return to sound money

This white paper offers expert insights into economic growth, inflation, monetary policy, and the forces shaping the markets.



  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • 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.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
  • 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.

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