Vanguard’s Market Outlook for the Coming Decade

In the recently published “Vanguard Economic and Market Outlook for 2018: Rising Risks to the Status Quo”, Vanguard takes an increasingly guarded stance. The authors state that the most pronounced risk of 2018 is that already tight labor markets will grow tighter, finally leading to a cyclical uptick in inflation. An unexpected increase in inflation may cause markets to drop in anticipation of tighter monetary policies from the world’s central banks.

The job of the Federal Reserve is “to take away the punch bowl just as the party gets going,” said former Fed Chairman, William McChesney Martin. Well, the party has definitely gotten going, with 2017 poised to be the ninth consecutive year of an increase in all the U.S. major market indexes, the longest such historical run. The S&P 500 Index (up 19.5% year-to-date as of 11/28/2017) is now at a point where the Cyclically-Adjusted Price-to-Earnings Ratio (Shiller P/E) has surpassed its level just prior to Black Tuesday in 1929. The only time it was ever higher was in the run-up to the Dot Com Crash of 2000. Not only has the Fed not taken away the punch bowl, it has arguably spiked it. The Vanguard authors are characteristically reserved when they state, “Elevated valuations, low volatility, and secularly low interest rates are unlikely to be allies for robust financial market returns over the next five years.”

Based on its econometric model that considers a wide range of variables, Vanguard’s “medium-run outlook for global equities has deteriorated a bit and is now centered in the 4%-6% range.” The 2017 Outlook from a year ago had it at 5%-8%. Vanguard’s forecast for bonds appears not to have changed. At Clarity, our advice continues to be for investors to hold a portfolio that is balanced among global equities and bonds, based on their ability, willingness, and need to assume risk.