Big mutual fund companies don't make bold calls often. So when they do, like Vanguard just did, it's wise to take notice.
Vanguard, the giant mutual fund company that's the largest owner of two-thirds of S&P 500 companies, this week said it expects a "global recession" to take hold in 2023. And that's the unescapable fallout from the Federal Reserve's push to contain inflation, says Vanguard's just-released economic and market forecast for next year.
Many firms put out forecasts. But Vanguard's is especially worth listening to. Why? The firm has a solid track record making predictions, says Jeff DeMaso of the "Independent Vanguard Advisor." DeMaso analyzed Vanguard's 10-year forecasts made in early 2013. Most were scarily correct.
What Vanguard Is Saying Now
Vanguard, famous for its long-term focus on index investing, says current conditions are eerily similar to conditions ahead of prior recessions. That's bad news. Recession appears to be on its way.
"Current and expected conditions are like those that have signaled past global recessions," the report said. "Significantly deteriorated financial conditions, increased policy rates, energy concerns, and declining trade volumes indicate the global economy will likely enter a recession in the coming year."
Vanguard is calling for the brunt of job losses to hit the technology and real estate sectors. And that stands to reason. They "were among the strongest beneficiaries of the zero-rate environment," the report said.
Moves to contain inflation will work, Vanguard says. But not this year or even next. "Reducing price pressures tied to labor markets and wage growth will take longer. As such, central banks may reasonably achieve their 2% inflation targets only in 2024 or 2025," Vanguard said.
And that means more pain for stocks. Stocks still haven't dropped as much as they should during recessions, according to the report.
Why Vanguard's Opinion Matters
It pays to listen to Vanguard as its predictions have often been on target.
Vanguard in its 2013 report called for U.S. stocks to gain between 6% and 9% in the following decade. That was spot on, DeMaso found. Vanguard's "Total World Stock Index fund returned 8.9% per year over the 10 years ending in November, which is within Vanguard's prediction — granted a spread of three percentage points is pretty darned wide."
Similarly, Vanguard's calls on U.S. Treasury yields and bond returns was on target, too. On bond returns, "the average return for all rolling 12-month periods since the end of 2012 of 1.7% landed within Vanguard's expected range," DeMaso found. Vanguard called for bond returns of 1% to 3%.
What Vanguard Says To Expect From Stocks
What is Vanguard saying about stocks? It expects them to return 4.7% to 6.7% per year over the next decade. That's down from the 2013 call, but still healthy.
And the "silver lining?" Stocks' weakness is creating opportunity with stocks, especially foreign and emerging markets.
"Longer term, however, our global equity outlook is improving because of lower valuations and higher interest rates. Our return expectations are 2.25 percentage points higher than last year," Vanguard said.
"From a U.S. dollar investor's perspective, our Vanguard Capital Markets Model projects higher 10-year annualized returns for non-U.S. developed markets (7.2%–9.2%) and emerging markets (7%–9%) than for U.S. markets (4.7%–6.7%)."
