What’s behind the current market volatility?

A lot of forces came together to make a correction likely. The long-running bull market, geopolitical tensions, expectations of higher inflation and interest rates, and changes in trade policies are all indicators of a potentially volatile market.

Looking ahead, those issues are still in play. In addition, a tighter U.S. labor market, followed by potentially rising wages and inflation, are likely to create new market conditions. For this year and beyond, our investment outlook is one of higher risk and lower returns.

Joe Davis
Joe Davis

“We’re trying to be realistic,” said Global Chief Economist Joe Davis. “We want investors to have realistic expectations for returns on their portfolios. In our view, this is where the balance and risks are for the markets for the next 5 years.”

As U.S. stock prices rise, the risk-return trade-off gets tricky.

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Davis admits that forecasting is a tricky business.

“My dad always told me, ‘Hope is not a strategy.’ We just want to make sure we’re setting reasonable expectations,” he explained.

Our market outlook underscores the need for investors to remain disciplined and globally diversified, armed with realistic return expectations and low-cost strategies.

How is Vanguard’s forecasting different?

For one thing, we shy away from shorter-term projections with pinpoint forecasts. For example, “Stocks will be up X% this year.” It’s very challenging to get those types of predictions right on a consistent basis. Instead, we recognize there are inherent risks in forecasting, and we know there are things we can’t know.

“We treat the future with the deference it deserves,” said Andrew Patterson, senior investment strategist.

Andrew Patterson
Andrew Patterson

Of course, we’re not perfect. For example, our expectation for the slowdown in job growth and expectations for an increase in inflation did not materialize as expected. But Patterson believes we should focus on longer-term economic developments, a trend that appears to be catching on.

“Over the last few years, we’ve actually seen a lot of other institutions gravitate toward our approach,” he said. 

What are my next steps?

“Our outlook is more conservative than it has been at any point since 2007 or 2008,” said Davis. “And investors should think carefully before taking on more risk in this environment.”

Before taking any action, we recommend reviewing your financial plan. No matter our predictions, we believe in maintaining a disciplined investment strategy that’s aligned to your goals and risk tolerance. But if you’re nervous about future returns, you can take steps to help weather the markets.

All investing is subject to risk, including the possible loss of the money you invest.