Vanguard Unveils 2019 Economic and Market Outlook Report

Recession unlikely in near-term, say Vanguard economists

VALLEY FORGE, PA (December 6, 2018)—Vanguard today released its 10th annual economic and market outlook — the firm’s comprehensive analysis on the current and future state of the global economy and financial markets. Despite slowing global growth, disparate inflation rates, and continued normalization for monetary policy, Vanguard economists believe that a near-term recession will be avoided. In short, economic growth should shift down but not out. From an asset return standpoint, Vanguard foresees a 10-year outlook for a balanced portfolio in the 4%-6% range, representing a modest improvement over 2018.1

“While market volatility over the past two-to-three months has some investors overly cautious going into 2019, our outlook, while still guarded for the near-term, shows optimism for long-term investors as we move into the next year,” said Joseph Davis, Ph.D, Vanguard’s Global Chief Economist and head of Vanguard’s Investment Strategy Group. “Higher short-term interest rates, coupled with improved international equity market valuations, slightly raises our expectations for long-term global investment returns for U.S. investors.”

Economic growth will shift down, but not out

Despite several factors pointing to a higher risk of a recession in 2019, Vanguard’s analysis on the fundamentals and historical drivers causing recessions concludes that the more likely scenario is a slowdown in growth, led by the U.S. and China. However, the expected easing of global growth over the next two years is charged with economic and market risks. Potential scenarios include the possibility of a severe deceleration of China’s economy, a policy mistake by the Fed as it raises rates further into restrictive territory, trade tensions, and other geopolitical and policy uncertainties.

Anchored inflation and normalized monetary policy

In previous outlooks, Vanguard research correctly anticipated that globalization and technological disruption would make it difficult for economies like those of the U.S., Europe, and Japan, among others, to reach and sustain 2% inflation. In 2018, Vanguard rightly anticipated a rise in core inflation across various economies. For 2019, our economists do not see a material risk of further strong rises in core inflation despite lower unemployment rates and higher wages. Higher wages are not likely to funnel through to higher consumer prices, as inflation expectations remain well-anchored. In the U.S., core inflation will likely continue hovering near 2%, potentially falling below the Fed’s inflation target in the second half of 2019. Higher wages are likely, but higher inflation is not.

Though as inflation continues to track to target levels, Vanguard economists warn economies could see an increased risk of volatility. As we observe the effects of monetary policy going forward, we can expect to see countries other than the U.S. just beginning to raise rates above post-crisis lows. Global central banks will be expected to continue on their gradual paths to normalization, which will likely include a rate increase from the European Central Bank in the third quarter. For the U.S., Vanguard has confidence that the Fed will continue on their gradual rate hike path, reaching the terminal rate of 2.75-3% in mid-2019, followed by a pause or stop to reassess economic conditions.

An improved, though guarded, investment outlook

While our return outlook remains guarded and well below historical norms, Vanguard economists have found some optimism for long-term investment returns over the next decade. According to Vanguard’s Capital Markets Model projections—Vanguard’s proprietary investment analysis tool used to produce simulations and analyses that help to inform effective investment decisions—our global outlook for equities is in the 4.5%-6.5% range for returns. This remains starkly lower than the experience of previous decades and of the post-crisis years, when global equities have risen 12.6% a year since the trough of the market downturn. Strong performance over the past 9 ½ years has raised valuations much higher, and they remain elevated relative to  Vanguard’s “fair-value” CAPE benchmark in the United States, hence the more guarded outlook than what may be reflected in investors’ portfolios as of late.

The expected returns in the U.S. are slightly lower than those for global or international markets, which emphasizes the importance of global diversification going forward. Vanguard’s outlook for U.S. equities over the next decade is in the 3%-5% range and we can expect to see equity valuations continue to contract as interest rates rise over time. For non-U.S. equities, investors will likely see returns in the 6%-8% range.

Continued interest rate increases have positively benefited Vanguard’s outlook for fixed income markets versus previous reports. Over the next 10 years, investors can expect to see global fixed income returns in the 2.5%-4.5% range. Non-U.S. bond investors could expect returns from 2%-4%, and while slightly lower than that of U.S. bonds, would still provide positive diversification benefits in a balanced portfolio.

“As the global markets continue to move into a lower orbit of returns, it’s only natural that investors start seeking out strategies to help increase their chances for investment success,” said Mr. Davis. “These strategies, like reaching for yield or reaching for return, while tempting, are still unlikely to escape the forces of expected lower portfolio returns, especially when compared with the unprecedented returns investors have experienced over the past decade.”

Given the somewhat challenging outlook ahead, it’s important investors focus on key factors like saving more, spending less, and controlling investment costs, rather than concentrating on the less reliable benefits of ad-hoc portfolio tilting. Additionally, Vanguard believes investors should continue to adhere to time-tested investment principles such as maintaining a long-term focus, employing a disciplined asset allocation, and conducting periodic portfolio rebalances.


About Vanguard

Vanguard is one of the world’s largest investment management companies. As of October 31, 2018, Vanguard managed $5.0 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers more than 400 funds to its more than 20 million investors worldwide. For more information, visit

1 Balanced portfolio represents a 60/40 stock/bond dollar-denominated balanced portfolio 

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Investments in bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Diversification does not ensure a profit or protect against a loss in a declining market.

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.