Vanguard’s then-CEO Bill McNabb wrote those words to Vanguard crew amid a sharp downturn in global stock markets, which followed Standard & Poor’s downgrade of U.S. sovereign debt from AAA to AA+. In so doing, he continued a tradition of company executives invoking “Vanguard weather” in messages to crew and clients alike.

Springtime may be fast approaching in the northern hemisphere, but Vanguard weather—marked by high levels of financial-market volatility and economic uncertainty—is upon the financial world once more.

Numerous increases in the interest rate targets set by major central banks—in the United States, the Federal Reserve’s historically aggressive campaign to rein in inflation just turned a year old—have helped curb price increases, as intended. But inflation in the United States, Europe, and elsewhere remains too high. Unintended effects of higher rates have surfaced in the form of some instability in the banking sector. Stock and bond markets worldwide have grown more volatile.

Vanguard economists’ “base case” for 2023 has long involved a U.S. recession in the second half of the year. Conditions in the banking sector and the softening of the housing market highlight the impact that rising rates have on rate-sensitive economic sectors. Markets may remain volatile in the weeks and months ahead as the full impact of continued monetary tightening become apparent. 

We continue to expect the Fed to ultimately raise its current 4.5% policy rate to 5.5%–5.75% and leave it there through at least the end of 2023. We’ve recently increased our view for the European Central Bank’s terminal rate, to a range of 3.75%–4%. The ECB’s March 16 action lifted its key rate target to 3.0%.

We also continue to expect mild recessions in major developed economies, including those of the United States, the United Kingdom, and the euro area, in 2023. 

Vanguard Global Chief Economist Joe Davis said financial stability is apt to prevail and the Fed likely will pause its course of interest rate hikes before year-end.

“But financial stability does not preclude financial market volatility,” Davis said. “As we noted in our economic and market outlook this year, bringing inflation down was never going to be easy.” 

We encourage our clients to consider their role in the markets. Securities traders try to anticipate and capitalize on short-term changes in market interest rates and securities prices. Investors, in contrast, should maintain a much longer-term focus, commensurate with their time horizons.

We believe that the critical steps for investors are to:

• align their asset allocations with their risk tolerance;
• control costs;
• adopt realistic expectations;
• hold a broadly diversified portfolio; and
• maintain discipline.

We are confident that investors armed with well-considered investment plans and realistic expectations can navigate the current bout of Vanguard weather and continue to make progress toward their long-term financial goals. 

• Perspectives on banking developments and volatility (3:01 video, issued March 2023)
• Bank closures, market volatility call for perspective (article, issued March 2023)
• Advice for investors feeling anxious (3:16 video, issued March 2023)
• Strong data could push U.S. recession down the road (article, issued February 2023)
• Vanguard's principles for investing success (durable web page)