7 Big Economic Predictions: Vanguard
The economic outlook for the next 10 years will be one of resiliency, with the U.S. in 2014 and 2015 facing cyclical risks tilted toward better-than-trend growth for the first time since the onset of the global financial crisis, Vanguard said Thursday.
In releasing its economic and investment outlook for the next decade, Vanguard makes its predictions for seven key areas: the global economy, inflation, monetary policy, interest rates, the bond market, the global equity market and asset allocation strategies.
1. Global economy. For the first time since the financial crisis, Vanguard’s leading indicators point to a slight pick-up in near-term growth for the United States, parts of Europe, and other select developed markets. Continued progress in U.S. consumer deleveraging, strong corporate balance sheets, firmer global trade and less fiscal drag point to U.S. growth approaching 3%. Those positives, however, need to be considered alongside high unemployment and government debt; ongoing structural reforms in Europe, China, and Japan; and extremely aggressive monetary policies whose exit strategies have yet to be tested.
4. Interest rates. The bond market continues to expect Treasury yields to rise, with a bias toward a steeper Treasury yield curve until the Federal Reserve raises short-term rates. Vanguard’s estimates of the fair value range for the 10-year Treasury bond have risen and suggest that the 10-year yield may range from 2.5%-3.5% over the next year. Vanguard believes that a more normalized environment, where rates move toward 5%, may be several years away.
5. Bond market. The return outlook for fixed income is muted, although it has improved somewhat given the recent rise in real rates. The expected long-run median return of the broad taxable U.S. fixed income market is in the 1.5%–3% range, versus the 0.5%-2% range this time last year. Nevertheless, the diversification benefits offered by fixed income in a balanced portfolio continue to be very important. Vanguard believes that the prospects of losses in bond portfolios should be weighed against the magnitude of potential losses in equity portfolios as the latter have tended to exhibit much larger swings in returns.
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