Expert insight

Sound money’s return: Not a risk shield but a long-term plus

January 04, 2024

Joe Davis

Vanguard Global Chief Economist

The recent reemergence of positive real interest rates—that is, rates that exceed the pace of inflation, enabling the purchasing power of savings and investments to grow over time—boosts the outlook for long-term financial market performance. In the near term, however, U.S. equity valuations appear “frothy,” and the Federal Reserve is unlikely to deliver the widely expected soft (recession-free) U.S. economic landing.

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Those were among the central arguments made by Joe Davis, Vanguard's global chief economist, on the Investopedia Express with Caleb Silver, a podcast recorded December 19.

Interest rates are likely to settle at higher levels than before the onset of COVID-19, leading to higher expected long-term returns for all portfolios, Davis said. But investment risks in 2024 include:

  • A greater U.S. economic slowdown, including a recession in the second half of the year, in a delayed response to the Fed’s aggressive campaign of monetary policy tightening;  
  • An overhang of debt in China; and
  • His “greatest, non-consensus worry”: The possibility that the Fed cuts its target for short-term interest rates too aggressively, too soon, allowing inflation to accelerate anew in a repeat of a 1967 policy error.

Listen to Davis’s interview, beginning around the 9:20 mark (full podcast: 31:13) at Investopedia. You can also listen via Apple Podcasts, Spotify, Google Podcasts, or PlayerFM. 

Listen
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Notes:

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. 

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