Monthly market perspectives
September 01, 2022
We place the likelihood of a U.S. recession at about 25% in the next 12 months and 65% in the next 24 months. Vanguard is downgrading our China growth forecast for full-year 2022 from 3.0%–4.0% to 2.5%–3.5%. We expect the Federal Reserve to increase its federal funds rate target to a range of 3.25%–3.75% by the end of the year.
Our 10-year, annualized, nominal return projections, as of June 30, 2022, are shown below. The figures center on the 50th percentiles of the distributions of our projected returns. We present 2-percentage point ranges around the central tendencies of equity return distributions and 1-percentage point ranges around the central tendencies of fixed income return distributions.
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 June 30, 2022. Results from the model may vary with each use and over time. For more information, see the Notes section.
Source: Vanguard Investment Strategy Group.
United States
Vanguard has downgraded our forecast for 2022 growth in the United States on the back of a second consecutive quarter of economic contraction.
Notes: This chart shows the one-year annualized returns for the S&P 500 Index from 1973 through 2021. The shaded areas represent months where the U.S. economy was in recession as defined by the National Bureau of Economic Research.
Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.
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.
Euro area
Vanguard maintains its estimate of full-year 2022 euro area economic growth of 2% to 3%, and our outlook for 2023 growth of 0.5% to 1.5%. But risks are skewed to the downside.
China
Economic data published for July showed a weaker-than-expected recovery from the second-quarter slump in China. Consumer spending remained particularly subdued. These data, in addition to the broadening property market downturn, lead us to downgrade our GDP call for full-year 2022 from 3%–4% to 2.5%–3.5%.
Emerging markets
For the emerging markets, we maintain our full-year 2022 economic growth estimate of about 3.0%, down from around 5.5% at the start of the year. Our current view is below consensus; the International Monetary Fund, for example, projects growth of 3.6%.
The Fed raised the target for its federal funds rate by 75 basis points on July 27, to a range of 2.25% to 2.50%, and said such an “unusually large” rate increase may be appropriate again in September to bring inflation under control.
• Vanguard expects the Fed to increase its federal funds rate target to a range of 3.25% to 3.75% by the end of the year, from a target of 0% to 0.25% at the start of the year.
• We continue to expect a terminal rate of at least 4% in 2023 to get inflation under control. That would put the policy rate well above the Fed’s assessment of the neutral rate, which Fed Chair Jerome Powell said was around the Fed’s new rate target. (The neutral rate is the theoretical monetary policy rate that would neither stimulate nor restrict economic activity.)
Consumer prices in the United States, as measured by the Consumer Price Index (CPI), were unchanged on a seasonally adjusted basis in July. On a year-over-year basis, prices were up 8.5% in July, down from 9.1% the month before.
The labor market in the United States crushed expectations, adding 528,000 jobs in July.
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