Monthly market perspectives
April 26, 2022
We expect the Federal Reserve to raise short-term interest rates by 150–200 basis points in 2022. Risks to U.S. growth from oil prices have moderated, and we still expect full-year GDP growth of around 3.5%. The U.S. unemployment rate should fall to its 3.5% pre-pandemic level in the second quarter and even further by year-end.
Our 10-year, annualized, nominal return projections are shown below. The categories marked with an asterisk (*) reflect a February 28, 2022, running of the Vanguard Capital Markets Model® (VCMM) for broad equity and fixed income asset classes only. Outlooks for the remaining sub-asset classes reflect a December 31, 2021, running of the VCMM. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
IMPORTANT: The projections or 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. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of February 28, 2022, and December 31, 2021. Results from the model may vary with each use and over time. For more information, see the Notes section.
Source: Vanguard Investment Strategy Group.
Recent developments have been consistent with Vanguard’s view for full-year GDP growth around 3.5% in the United States. We’re keeping a close eye, however, on interest rates, monetary policy, and their potential growth effects.
The growth environment in the euro area is challenged by the war in Ukraine, the resulting higher energy prices, reduced confidence, and somewhat tighter financial conditions. We continue to foresee full-year growth in a range of 2.5% to 3%, lower than our outlook before the war for growth around 3.5%.
Worsening COVID-19 outbreaks have led to lockdowns affecting more people in China than at any other point since 2020 and purchasing managers’ index readings imply that a sharp economic slowdown took hold in March.
Vanguard continues to see economic growth around 5.5% in emerging markets broadly in 2022, but high food and energy prices related to the war in Ukraine place risks firmly to the downside.
The Consumer Price Index (CPI) in the United States rose by 8.5% in March compared with a year earlier, higher than a 7.9% year-on-year gain in February. That gain alongside a seasonally adjusted month-on-month gain of 1.2% was largely in line with market expectations.
Accelerating inflation and a still-tightening labor market have led us to revise our view on the Federal Reserve. We foresee the equivalent of six to eight 25-basis-point hikes to the federal funds rate target in 2022, with the potential for one or two 50-basis-point hikes in the mix. (Any 50-point hike would count as two of our anticipated 2022 hikes.)
Sources: Vanguard calculations, based on data from the U.S. Treasury, the U.S. Bureau of Economic Analysis, Bloomberg; CRSP; Kenneth R. French's website, at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html; Robert Shiller's website, at aida.wss.yale.edu/~shiller/data.htm; Standard & Poor's; MSCI; Dow Jones; and Russell, as of December 31, 2021.
Past performance is no guarantee of future returns.
The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
The unemployment rate in the United States fell to 3.6% in March, just a shade above its pre-pandemic low, as job creation remained strong.
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