Vanguard CEO, top execs offer lackluster stock market forecast for 2022 and beyond

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Vanguard CEO Mortimer “Tim” Buckley and two top strategists at the firm said investors should expect the stock market to post far more modest returns over the coming decade compared with recent years while offering a guarded but positive outlook for the global economic recovery.

Over the next decade, investors should expect 2% to 4% U.S. equity market returns annually, the Vanguard panel said. That’s far below last year, when “we had a return in the S&P 500 of close to 28%,” said chief investment officer Greg Davis, who joined Buckley.

“Those are not sustainable returns,” Davis added. “We were fortunate in terms of what the equity markets produced for the last decade. It is unlikely that we will see the same type of returns going forward.”

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Sara Devereux, global head of fixed income, completed the trio, who appeared to take online questions from audience participants. Vanguard’s forecast for stock market gains is well below Wall Street consensus: a Reuters poll of strategists believe the S&P 500 would gain 7.5% in 2022 to finish at 4,910.

With the pandemic remaining a threat, policymakers will effect the recovery by how they go about removing support and stimulus packages enacted to combat the pandemic-driven downturn, the Vanguard executives said in their one-hour webinar broadcast Monday evening.

The tremendous amount of fiscal and monetary policy support in the marketplace has helped get the U.S. economy running again. But the firm sees “more moderate economic growth both in the U.S. and Europe,” Davis said. “We are expecting about 4% or so in terms of economic growth. Even places like China that have historically had gangbusters-type economic growth, we are expecting growth to slow down to around 5% or so.”

Vanguard’s forecast is higher than others: Goldman Sachs economists lowered their forecasts for 2022 U.S. gross domestic product growth to 2% in the first quarter from 3% previously, citing the failure to pass the federal Build Back Better bill.

Vanguard expects inflation to moderate over the “next couple of years. We are not expecting the type of inflationary environment we saw in the 1970s where inflation was rising in double-digit rates.”

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Vanguard’s muted expectations for investors extended to bonds. The Federal Reserve has signaled it will start increasing interest rates, and as a result “our return expectations for fixed income ratcheted up a small amount but we are expecting 1.5%-2.5% over the next decade for the broad-based fixed income category.”

Devereux said she expected that bond returns outside the U.S. “will be a little lower than [in] the U.S. That said, we do find value in buying hedged global bonds because there is a diversification benefit. It helps insulate against results and risks specific to the U.S.”

She expects interest rates “to be going higher, and for a muni investor, this gives them potential for tax-exempt income. I would summarize it by saying, yes, returns are expected to be low in fixed-income markets, but if we learned one thing during the COVID-19 crisis, it is that power of bonds as insulation when the equity market is selling off.”

While the latest inflation growth totaled roughly 7% year-over-year, “we will go back to an environment where inflation will be in the 1.5%-2.5% range,” Davis said. “The market is pricing in 2.5% inflation for the next decade. That is in our wheelhouse of what we expect.”

One strategist agrees that above-average inflation won’t persist. “Supply chain disruptions will likely spill over into the new year, but their impact should eventually subside,” said Jason Pride, chief investment officer for Private Wealth at Glenmede Trust in Philadelphia.

Ongoing supply chain disruptions “remain a key culprit behind hotter-than-normal inflation. Clearing the backlog of shipments may be key to wrestling inflation under control and boosting inventories,” Pride added.

Others such as Matt Topley, chief investment officer at Lansing Street Advisors in Ambler, said Vanguard’s inflation forecast is too low: “Inflation will be a lot higher in the next two to three years than Vanguard’s 1.5%-2.5%, closer to 4%. I can’t say long-term, but what’s going up like rents and wages are hard to reverse, even when supply chain resolves.”

Asked about meme culture’s effect on Wall Street and individual investors, Buckley urged ignoring the hype.

“You will probably run out of money before you can cash out on these trends. What do you do? You ignore them,” he said.

Buckley also took audience questions about cryptocurrencies and whether Vanguard would offer any sort of crypto-invested fund.

“A company has underlying earnings, so you know how much you are paying,” he said. “Crypto doesn’t have that. It is simply a supply-demand marketplace. As long as demand increasingly exceeds supply, you will get a nice return. But you are depending on that.”

Crypto is “hugely popular, highly volatile, but we don’t see why it would be in a typical Vanguard portfolio. If you are going to invest in it, do it outside of the money you have dedicated to your long-term goals.”

Regarding portfolios based on environmental, social, and governance [ESG] factors, Davis called it a popular segment of the marketplace. “There are some investors that prefer not to have exposure to tobacco, alcohol, firearms, things of that nature. ESG products allow you to express those views, and Vanguard has funds that exclude those sectors.”