Vanguard Emphasizes Economic Stabilization, Despite Sustained Low-Growth World

VALLEY FORGE, Pa., Dec. 5, 2016 /PRNewswire/ -- In its 2017 Economic and Market Outlook released today, Vanguard affirms that the low-growth, low-rate world is here to stay, driven by secular forces that have shaped the global economy and tempered its growth for four decades. In Vanguard's view, the seminal themes of globalization, the demographic headwinds of an aging global workforce, and rapid advances in technology are the pervasive structural economic drivers over the long term. Importantly, Vanguard rejects the persistent myth of economic stagnation and believes the world is adjusting to the disruption of structural deceleration.

"The extremes that we are bombarded with each and every day—negative income rates, Brexit, income inequality—may seem like isolated events, but we know that they are inextricably linked by these secular forces," said Joseph Davis, Ph.D, Vanguard Global Chief Economist and head of Vanguard Investment Strategy Group. "Perhaps most significantly, we are focused on the changing tides of technology and a gig economy. This is a significant disruptor, yet the global economy has a remarkable ability to adapt to change. We anticipate muted, but enduring and positive economic growth in the years ahead."

In contrast to the unprecedented role of the central banks in stabilizing economic growth since the global financial crisis, Vanguard economists maintain current economic conditions cannot be countered solely by cyclical policy stimulus. The global expanse of low growth has reached a critical state, and the effectiveness of monetary policy has reached its limit. Moving forward, focus should shift toward meaningful fiscal policy changes.

Amidst persistent global weakness, the U.S. economy remains resilient.  The U.S. economy has been expanding for seven years—more than double the average length of an expansion—and Vanguard economists expect a continued long-term growth path of about 2% per year. Yet, researchers acknowledge that this abnormally long period of growth is not without tail risks, and markets will remain highly sensitive to unexpected shocks.

The policy direction of the new administration, along with the associated uncertainty, will prove meaningful over the long term. In particular, the rollout of fiscal and trade policies have significant implications for the global economic environment. More expansionary domestic policies, such as tax cuts and infrastructure spending, along with an unforeseen flare-up in inflationary pressures, could potentially trigger the acceleration of interest rates. In addition to policy drivers, international influences, such as the breakdown of Brexit negotiations or global spillovers from emerging market volatility, have the potential to dislocate the current expansion.

With these global and domestic challenges as backdrop, Vanguard's outlook for global stocks and bonds is the most guarded it has been in ten years. The expected ten-year median return of the global fixed income market is centered in the 1.5-2.5% range, resembling the historical bond returns of the 1950s and 1960s. Vanguard forecasts show that the median outlook for global equities is in the 5-7% range, significant departure from returns experienced since the market bottomed in March of 2009.

Signals and noise: Avoid the lure of short-termism

Vanguard's probabilistic framework for forecasting can provide meaningful context for market movements, alarming headlines, and continuous uncertainty. Most importantly, this economic and investment analysis reinforces the need for a long-term perspective and goals-based approach to portfolio construction.

In anticipation of compressed return opportunities, investors may be enticed to implement portfolio strategies dependent on market conditions or economic projections. To underscore the risks of this approach, Vanguard economists conducted an examination of portfolio strategies designed to perform in low-yield, high-yield, and expected-yield scenarios. Conclusively, portfolios designed for a single scenario have narrow upside, coupled with large margins of error. Vanguard's analysis illustrates that a diversified portfolio performs best for investors who do not have a strong conviction about the future state of the economy, meaning it exhibits better downside outcomes relative to long-duration or short-duration strategies.

"Given our outlook for 2017 and beyond, some investors might be tempted to add new asset classes or apply portfolio tilts in search for alpha in a low-growth world, which could expose them to undue risk and potentially erode their assets over time," said Vanguard CEO Bill McNabb. "Now, perhaps more than ever, investors will benefit most in the long run by increasing their savings contributions, reducing their investment costs, and maintaining a thoughtful asset allocation course to reach their goals."

Vanguard's global market outlook points to a more challenging environment ahead, yet one in which investors with an appropriate level of discipline, diversification, and patience are likely to be rewarded over the next decade with fair inflation-adjusted returns.

About VanguardVanguard is one of the world's largest investment management companies. As of November 30, 2016, Vanguard managed $3.8 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers more than 350 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.

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.

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