Big mutual fund companies don’t often make bold calls. So when they do, as Vanguard just did, it’s wise to take notice.
Vanguard, the giant mutual fund firm that is the largest owner of two-thirds of S&P 500 companies, this week said it expects a “global recession” in 2023. And that’s the inevitable fallout from the Federal Reserve’s push to contain inflation, says Vanguard’s just-released economic and market forecast for next year.
Many companies publish forecasts. But Vanguard is especially worth a listen. How come? The firm has a solid track record of making predictions, says Jeff DeMaso of “Independent Vanguard Advisor.” DeMaso analyzed Vanguard’s 10-year forecasts made in early 2013. Most were frighteningly correct.
What is Vanguard saying now
Vanguard, famous for its long-term focus on investing in indices, says current conditions are eerily similar to those before previous recessions. This is bad news. Recession appears to be on its way.
“Current and projected conditions are like those that have signaled past global recessions,” the report said. “Significantly deteriorated financial conditions, rising policy rates, energy concerns and declining trade volumes indicate that the global economy is likely to enter a recession next year.”
Vanguard is calling for the brunt of the job losses to hit the technology and real estate sectors. And this is reasonable. “They have been among the biggest beneficiaries of the zero-interest environment,” the report said.
The moves to contain inflation will work, says Vanguard. But not this year and not next either. “Reducing price pressures related to labor markets and wage growth will take longer. Therefore, central banks can reasonably meet their 2% inflation targets only in 2024 or 2025,” Vanguard said.
And that means more pain for the shares. Stocks have not yet fallen as much as they should during recessions, according to the report.
Why Vanguard’s opinion matters
Vanguard is worth hearing as its predictions have often been on the spot.
Vanguard in its 2013 report called for US stocks to gain between 6% and 9% over the next decade. It was perfect, DeMaso discovered. Vanguard’s “Total World Stock Index (VTWAX) fund has returned 8.9% a year over the 10 years ending in November, which is within Vanguard’s forecast – given that a three percentage point spread is damn wide.” .
Similarly, Vanguard’s calls on US Treasury yields and bond yields were also targeted. As for bond yields, “the average yield for all consecutive 12-month periods since the end of 2012 of 1.7% was within the range expected by Vanguard,” DeMaso noted. Vanguard has called for bond yields of 1% to 3%.
What Vanguard says to expect from the stock
What does Vanguard say about stocks? He expects them to return 4.7% to 6.7% annually over the next decade. It’s down from the 2013 call, but it’s still in good health.
And the “bright side?” Weakness in equities is creating opportunities with equities, especially overseas and emerging markets.
“Long-term, however, our global equity outlook is improving due to lower valuations and higher interest rates. Our return expectations are 2.25 percentage points higher than last year,” said Vanguard .
“From the perspective of a US dollar investor, our Vanguard Capital Markets model predicts higher 10-year annualized returns for non-US developed markets (7.2%–9.2%) and emerging markets (7%– 9%) compared to US markets (4.7%–6.7%).”