Expert insight
The ‘best financial development’ in 20 years, explained
January 16, 2024
The recent reemergence of positive real interest rates—that is, interest rates that are higher than the pace of inflation—is the “single best financial development” of the past 20 years, giving investors a good reason to expect solid risk-adjusted returns over the long term, one of Vanguard’s top economists said in an episode of the Bogleheads on Investing podcast, recorded December 21.
Qian Wang, chief economist for the Asia-Pacific and global head of the Vanguard Capital Markets Model®, also addressed:
- Economic resilience in the face of historically aggressive monetary policy. The vast majority of U.S. consumer debt is fixed at low rates, so higher interest rates have yet to affect most borrowers. The delayed economic “bite” of tighter monetary policy is one reason why we expect a mild U.S. recession in the second half of 2024.
- The direction of interest rates. While Vanguard expects modestly lower interest rates by the end of 2024, rates will stay higher than they've been for much of the past 15 years. “We think the Fed and global central banks will cut interest rates … but even if they cut, we don’t think we will get back to zero interest rates anytime soon. Zero rates are just yesterday’s news.”
- The prospects for financial market returns over the coming decade. As detailed in our 2024 economic and market outlook (24-page PDF), “bonds are back” due to their higher yields. And while the overall U.S. stock market appears overvalued, certain market segments and non-U.S. shares present opportunities. “Diversification is still the best preparation ... for all kinds of possible outcomes in the future,” Wang said.
Listen to Wang’s interview (58:13 podcast) at PodBean, or wherever you get your podcasts.
Related links:
- Sound money’s return: Not a risk shield but a long-term plus (31:13 podcast, issued January 2024)
- Vanguard’s economic and market outlook for 2024 (hub, issued December 2023)
- Sara Devereux on a new era for fixed income (4:26 video, issued December 2023)
Notes:
About the Vanguard Capital Markets Model:
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. 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.
All investing is subject to risk, including the possible loss of the money you invest.
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. Diversification does not ensure a profit or protect against a loss.
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.
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.
