Vanguard investors are famous for staying invested — and accepting the market's and S&P 500's long-term returns. But if Vanguard's predictions are right, those future asset returns likely aren't what investors are hoping for.
Just released 10-year forecasts from Vanguard reveal the firm's views on 18 major asset classes, ranging from U.S. stocks to cash. And some of the returns are downright disappointing as they fall well short of historical averages.
The scariest prediction of them all? U.S. stocks, for instance, will rise just 4.7% to 6.7% annually over the next 10 years, Vanguard says. That's a fraction of the S&P 500's annualized 9.3% return going back to 1928.
Much of Vanguard's dour forecast stems from its near-certainty a recession will arrive in 2023. "We still assign a 90% probability to a U.S. recession in 2023 and view a path to a soft landing as exceptionally narrow. We expect only marginal growth, around 0.25%, for the full year," the report says.
Vanguard: Value Stocks To Keep Beating Growth
If you're waiting for S&P 500 growth stocks to overtake value ones again, you might want to reconsider, Vanguard says.
U.S. growth stocks will only rise a lackluster 3.1% to 5.1% annually in the next 10 years, Vanguard says. That's well below the 4.7% to 6.7% annual returns expected from U.S. value stocks.
And if you think you'll get a big bump with small stocks, Vanguard says you're mistaken there, too. U.S. small-cap stocks will only return between 5.0% and 7.0% annually, Vanguard predicts.
Value stocks have been pulling ahead, so this is just a continuation of the S&P 500's trend. The SPDR Portfolio S&P 500 Growth ETF is down nearly 18% in the past year. During that time, the SPDR Portfolio S&P 500 Value ETF is up 0.4%.
International Stocks Will Be Superior
Vanguard might be downbeat on U.S. stocks. But the giant money manager is more sanguine on stocks of companies outside the U.S.
Global stocks, excluding the U.S., will rise 7.4% to 9.4% a year over the next 10 years, Vanguard says. At the high end of the range, that means non-U.S. stocks will outperform U.S. stocks by more than 40%.
Meanwhile, emerging markets stocks are seen rising up 7% to 9% annually. This is a wake-up call for many U.S. investors who tend to underweight non-U.S. stocks.
Bonds To Beat Growth Stocks?
And here's a shocking revelation, too. Vanguard thinks U.S. aggregate bonds, much like you'd own in the iShares Core U.S. Aggregate Bond ETF, will return anywhere from 4.1% to 5.1% annually.
If that's right, it means you'll very possibly make more on a basket of government and corporate bonds than you will from growth stocks in the S&P 500 in the next 10 years.
And get this. If you're willing to take on more default risk in bonds, you could likely make still more than on U.S. stocks. Vanguard think U.S. high-yield corporate bonds will return 6.6% to 7.6% annually. And emerging markets bonds are seen rising 6.4% to 7.4% annually.
Vanguard may be a top owner of most U.S. stocks, the largest money manager and steward of trillions of dollars. But it could be wrong. For instance, it thinks U.S. inflation will only be 2% to 3% annually over the next 10 years. Prices are rising much faster than that now.
But Vanguard's solid track record makes the firm worth listening to.
Vanguard's Calls For The Next Decade
| Stocks | Annualized return projection |
|---|---|
| U.S. stocks | 4.7%-6.7% |
| U.S. value | 4.7%-6.7% |
| U.S. growth | 3.1% - 5.1% |
| U.S. large cap | 4.7% - 6.7% |
| U.S. small cap | 5.0% - 7.0% |
| U.S. real estate investment trusts | 4.9% - 6.9% |
| Global stocks ex-U.S. | 7.4% - 9.4% |
| Global ex-U.S. developed markets | 7.2% - 9.2% |
| Emerging markets | 7.0% - 9.0% |
| Bonds | Annualized return projection |
| U.S. aggregate bonds | 4.1% - 5.1% |
| U.S. Treasury bonds | 3.7% - 4.7% |
| U.S. credit bonds | 4.7% - 5.7% |
| U.S. high-yield corporate bonds | 6.6% - 7.6% |
| U.S. Treasury Inflation-Protected Securities | 3.2% - 4.2% |
| U.S. cash | 3.4% - 4.4% |
| Global bonds ex-U.S. | 4.0% - 5.0% |
| Emerging markets govt. bonds | 6.4% - 7.4% |
| U.S. inflation | 2.0% - 3.0% |
Sources: IBD, Vanguard
Follow Matt Krantz on Twitter @mattkrantz
