Vanguard leaders discuss what the impact could be of a prolonged global low-rate environment


In this webcast excerpt, Vanguard Chairman and CEO Bill McNabb and Chief Investment Officer Tim Buckley discuss the potential impact of a prolonged global low-rate environment. Watch the full replay »

Other highlights from this webcast:

Notes:
Quantitative easing is a monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
All investing is subject to risk, including possible loss of principal.
Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.


TRANSCRIPT 

Rebecca Katz: And we had a question from Jim in Massachusetts who said, “Your December 2015 Economic and Investment Outlook states that we view the global low-rate environment as secular, not cyclical. Explain that distinction and what does it mean to investors?” So, Tim, your group produces that.

Tim Buckley: Right. So what I would say is if you think secular, just think, “Well, for the foreseeable future” is the best way I could explain it. We expect low rates globally for the foreseeable future. And you only have to look at it, Rebecca, and say, “Well, come up with a reason why rates are going to go dramatically higher.” For them to go dramatically higher, you’d have to change your expectations around inflation and global growth. And we just don’t see those signs. We just talked about China slowing down its growth. We talked about the U.S. just plugging along. I didn’t mention Europe, though, right, and Europe’s eking along. It’s got growth, but it’s nothing to write home about. So you don’t see the upper pressures of global growth that would push rates up and push inflation expectations. Commodities, commodities, well, we all know the price of oil is tanked. And then if you look at other commodities, inputs to many industries, they continue to head down so you don’t have inflationary pressures there. And then we look a lot. We look a lot, Bill, right. We look at the wages in the U.S., wage growth. We’re at full employment, but you’re not seeing a lot of wage pressure. So you’re just not seeing the measures that would tell you to expect rates to jump up. If you saw pressures in those areas, you’d see it. But there’s another thing capping where rates are, and that is there’s really a glut of global savings. There is a lot of money searching for yield out there, whether it’s insurance companies or sovereign wealth, corporations, or individuals. Whenever any market you start to see a rate pop up where someone can get yield, everyone starts rushing towards it and goes in and buys and pushes it back down. So there is a lot of money sloshing around looking for yield and that helps keep global rates lower too. So we see it as an environment that where you can expect global we can expect low rates.

Rebecca Katz: Well, we saw the Fed raised rates a little bit here in the U.S. and that was welcome news, people looking for a little bit of yield especially in money market accounts. What have been the effects of that rate increase? We had a question from Darlene in Hawaii about that.

Bill McNabb: You know, there really haven’t been any discernible effects. This was very well anticipated. I think as you stated in the question, we’ve seen money market yields come up just a little bit. We welcome the rate increase in the sense that the sooner we get back to normal, if you will, from a monetary policy standpoint, we think that’s a good thing.

Rebecca Katz: So normal meaning they’ve backed off the quantitative easing* and now we’re—

Bill McNabb: Yes.

Tim Buckley: Yes, from an investor standpoint, so you take the economy out of it, we’ve seen some distortions and people take a lot more risk in their portfolios as they look for yield, as they look for return. They haven’t found it in money markets or short-term bond funds and they’ve taken more risk. We think if they can start to get that yield in those traditional safer areas, that would be a good thing from the investor standpoint.

Rebecca Katz: Well, do we expect the Fed to continue to raise rates, albeit gradually, since we’ve already talked about not a huge shift up in rates? And then how does that impact our expectations for stock and bond fund performance? Bill, do you want to take that?

Bill McNabb: Yes. So, you know, our current expectation is that the Fed will be very cautious but will raise rates over a period of time but the moves will likely be very incremental. And as Tim already said, we don’t really expect a big rise in long-term rates. Just a little bit more of a move toward normalization. When we think about the impact of this on markets, we don’t tend to look at short-term market predictions. We don’t think we’re any good at that. Actually, we don’t think anybody is, so I would tell you if you are reading headlines about what to expect in 2016, I would take them with a little bit of a grain of salt. But what we do do is we try to project out over the next decade, so over the next ten years what we think the probabilities of various returns are. And when we run our models today, sort of the central tendency for a balanced portfolio—60% stocks, 40% fixed income—the real return on that, so return after inflation, would be about 4.3%, 4.5%, something like that. That’s about a 1% or a little more lower than the 80-year historical average. So we are expecting more muted returns, if you will, over the next decade but not at sort of a disastrous level, if you will. And there are consequences of that. One of the consequences is for those who can save a little bit more in their 401(k) plans, their IRAs, and so forth, it’s a really good strategy to help offset that.

Important information
Quantitative easing is a monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

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