by Large mutual funds don’t often make bold decisions. So when they do, as Vanguard just did, it’s wise to watch out.
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Vanguard, the giant mutual fund that owns two-thirds of the S&P 500 companies, said this week it expects a “global recession” to come in 2023. says Vanguard’s just released economic and market forecast for next year.
Many companies publish forecasts. But especially Vanguard’s is worth listening to. Why? The company has a solid track record of making predictions, says Jeff DeMaso of the Independent Vanguard Advisor. DeMaso analyzed Vanguard’s 10-year forecasts in early 2013. Most of them were eerily correct.
What Vanguard says now
Vanguard, known for its long-term focus on index investing, says current conditions are eerily similar to those prior to previous recessions. That is bad news. The recession looks imminent.
“Current and projected conditions are similar to those of previous global recessions,” the report said. “Significantly deteriorating financial conditions, higher policy rates, energy concerns and declining trade volumes indicate that the global economy is likely to slide into recession in the coming year.”
Vanguard calls for most of the job losses to be in the technology and real estate sectors. And that speaks for itself. They “were among the biggest beneficiaries of the zero-rate environment,” the report said.
Measures to contain inflation will work, says Vanguard. But not this year or even next year. “Reducing price pressures associated with labor markets and wage growth will take longer. As such, central banks cannot reasonably meet their 2% inflation targets until 2024 or 2025,” Vanguard said.
And that means more pain for stocks. Shares still haven’t fallen as much as they should during recessions, according to the report.
Why Vanguard’s opinion matters
It pays to listen to Vanguard as the forecasts are often on target.
In its 2013 report, Vanguard called for US stocks to rise between 6% and 9% over the next decade. That was perfect, DeMaso discovered. Vanguard’s “Total World Stock Index (VTWAX) fund returned 8.9% per annum over the 10 years ending November, which is within Vanguard’s forecast — a spread of three percentage points is pretty damn wide.”
Similarly, Vanguard’s statements on US Treasury yields and bond yields were also on track. As for bond yields, “average returns for all rolling 12-month periods since the end of 2012 of 1.7% landed within Vanguard’s expected range,” DeMaso found. Vanguard called for bond yields of 1% to 3%.
What Vanguard says to expect from stocks
What does Vanguard say about stocks? It expects them to yield 4.7% to 6.7% annually over the next ten years. That’s less than the 2013 call, but still healthy.
And the “silver lining?” The weakness of equities creates opportunities with equities, especially foreign and emerging markets.
“Longer-term, however, our outlook for global equities is improving due to lower valuations and higher interest rates. Our return expectations are 2.25 percentage points higher than last year,” said Vanguard.
“From a US dollar investor perspective, our Vanguard Capital Markets Model expects higher 10-year annualized returns for non-US developed markets (7.2%–9.2%) and emerging markets (7%–9%) than for US markets (4.7%-6.7%).”
