In contrast to that of some forecasters, our approach acknowledges the significant role of uncertainty, especially in situations of some magnitude. Our focus on oil prices and financial conditions now is akin to our focus on vaccine efficacy and virulence of emerging variants in assessing potential impacts of the COVID-19 pandemic.
“With developments such as COVID-19 and now, unfortunately, the war in Ukraine, we think about economic outcomes in terms of scenarios,” said Andrew Patterson, Vanguard senior international economist. “Because of the uncertainty involved, we qualitatively and quantitatively work through multiple potential outcomes and try to assign probabilities to them. Our focus is pointed and situational.”
Vanguard doesn’t employ scenarios only in the context of history-defining events, however. The approach is just as valuable in the context of more commonplace uncertainty, such as that provided regularly by policymakers and the financial markets. For example, we present our long-term asset-return forecasts within a range of potential outcomes rather than as specific-point forecasts. We also present our optimal portfolios in the context of varying economic environments. (The Vanguard Economic and Market Outlook for 2022 includes both our asset-return forecasts and our optimal portfolios.)
But a scenarios-based approach is clearly prudent for the current challenge. “As we continue to assess developments related to Ukraine under this framework, we will incorporate relevant and timely updates into our perspective,” Patterson said. “We took a similar approach during the pandemic, incorporating views on vaccines’ efficacy, production, and distribution. We hope to incorporate details of a peaceful end to the war in Ukraine in our framework sooner rather than later.”