A look at the market in 2018

In what he calls the second longest, second strongest bull market in U.S. history, Vanguard Global Chief Economist Joe Davis explains the range of returns possible in your stock portfolio for the 2018 market.

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Rebecca Katz: Okay, our first question is from Felix in beautiful Bozeman, Montana. And Felix wants to know, what’s the range of market forecast for next year? I mean an obvious question; what do we think the markets are going to do? There’s been a lot of political and economic uncertainty, so it must be a little different than ranges in past years. And if you could just explain why we do ranges, and you don’t just say, “Hey, the markets are going to do X next year.

Joe Davis: Well I think there’s two things, and it’s a really important question. Let’s focus on the stock market, I presume, when talking about the market. Let’s focus on the stock market. I think there’s two things. One is there’s various investment professionals, market prognosticators; I mean the airways are full of them, so everyone has their sort of view of their best estimate of what the stock market may return say in 2018 or beyond. So that in itself has a, there’s a range of opinions.

Rebecca Katz: Sure.

Joe Davis: Vanguard ourselves, we provide a range of outcomes that we think are the most likely reasonable range; and so we have a distinctive approach because we believe, thinking about the future, there’s inherent uncertainty, but there are times when the likelihood of outcomes is higher on say the higher end of returns; and other times they’re at the lower end of the returns. So we always provide a range.

Those range of expected returns for the stock market, let’s focus on the U.S. market as just an example, they have come down for expectations for stock market returns relative to when you and I would have done this webcast last year; and they are lower than say when we did this webcast, believe it or not, seven or eight years ago when we were fairly optimistic, despite a somber environment. I place that in context because we now sit as investors, the second longest, second strongest U.S. bull market in history. Some of that performance has been a catchup to the global financial crisis, but that said, we are starting to see returns starting to deviate above the fundamentals would suggest. So what that means is we have lowered our range of expected returns for the U.S. stock market for the next several years. That’s a statistical methodology we worked through, and so I’d say from a range of expected returns say in the 4 to 6% range for the next several years, historically stock returns in the U.S. have generated on average, reinvested 8 to 10%. So it’s closer to half the expected return we’ve had.

Rebecca Katz: Um-hmm, and certainly not the most recent experience that many of us have had over the last year.

Joe Davis: No, and again, and our range of returns, well, when I say 4 to 6% return, you know, next year we will, the volatility in year to year will really vary. I’m talking about the next five to seven years what is a reasonable range. Our best estimates—and we put a lot of math and thought behind this—they have come down, in part because of the strong performance and part because valuations are starting to rise, meaning the stock market is starting to exceed the earnings growth, which has been pretty good.

So, again, we’re trying to be as realistic as we believe that we can be in this world to help investors make decisions they need to make. And so the answer to the question specifically, roughly 4 to 6% for a stock portfolio over the next several years.

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