February 16, 2022
In this webcast excerpt, Vanguard Chief Investment Officer Greg Davis discusses fiscal and monetary policy supports that have helped the global economy to weather the pandemic and our expectations for economic growth in the U.S., Europe, and China.
Greg also shares why we expect inflation to moderate in the next few years and outlines Vanguard’s projections for U.S. equity market returns over the next decade, based on Vanguard Capital Markets Model® simulations.
Massy: What are our perspectives on the global economy and how do you think these trends are going to impact the markets?
Greg: Well thanks for that question. I mean there's a number of things. First and foremost is really this aspect of we've been in an environment where there's been a tremendous amount of fiscal as well as monetary policy support in the marketplace, and that's really had an impact in terms of getting the economy running again while we're going through the midst of just a tremendous pandemic.
But what we're expecting as that policy's starting to get normalized over time, what we're expecting is more moderate economic growth, both in the U.S. as well as Europe where we're expecting about 4% or so in terms of economic growth. Even places like China that have historically had gangbuster type economic growth, we're expecting growth to slow down there as well to around 5% or so.
And then when we think about the higher levels of inflation that we've already seen because of supply chain disruptions and things of that nature, we are expecting that to start to moderate over the course of the next couple years. So when you think about our views that, again, we're not expecting the type of inflationary environment that we saw in the '70s where inflation was rising in double-digit rates. That's just not in the cards and not what we're forecasting.
Now, if we were to translate that in terms of what that means from a broad asset class return perspective, the first place that you have to start is really with valuations. And so when you look at where the equity market is today, valuations in U.S. equity markets do look stretched to us. They're at the highest levels we've seen since the dot.com era of the early and late '90s.
And so those types of things are, again, going to drive returns and our return expectations for the next decade or so. So when we look at U.S. markets, we're thinking that over the next 10 years or so, that investors should expect 2 to 4%, somewhere in that type of range as our base case for equity market, U.S. equity market returns per year for the next decade or so.
Again, if you look at 2021 where we had a return in the S&P of close to 28%, you know, again, those are not sustainable returns. We were very fortunate in terms of what the equity markets have produced, not just last year, but the last decade. So it's very unlikely that we're going to see the same type of returns going forward.
Watch the full webcast replay (55:00) for more. You might also like these webcast excerpts:
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Asset class return projections are based on Vanguard Capital Markets Model (VCMM) projections. IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of September 30, 2021. Results from the model may 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.
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