Retirement investors can expect continued market volatility and slower growth in 2019, but not a recession, according to Vanguard's annual economic and market outlook report.

But boomers and Gen Xers playing the catch-up game with their retirement portfolios will see stingier returns over the next decade, particularly in equities.

Lower returns on global equities, U.S. GDP to slow to 2%

Vanguard is projecting annual returns on global equities will average 4.5 percent to 6.5 percent for the 10-year period, compared to the 12.6 percent of annual gains in equities experienced since the financial crisis.

Vanguard, which managed $3.46 trillion in assets at the end of 2017, including $381.5 billion in target-date fund assets, sees the global economy growing for the next two years, albeit at a slower rate.

U.S. GDP will slow to 2 percent in 2019, a more “sustainable” rate of growth as the fuel from corporate tax cuts and monetary policy burns off, the report says. Europe and Japan, each in earlier stages of their growth cycles, will also see just modest growth.

Low unemployment, increasing wages, but no runaway inflation

Labor markets are expected to stay strong in the near-term, pushing wages higher.

But Vanguard does not expect those conditions to spark inflation or expedite aggressive interest rate hikes form central banks.

The report projects core inflation to remain at or below 2 percent in 2019, and “well below” 2 percent in Europe.

In the U.S., the Federal Reserve is expected to continue on its course of interest rate normalization, with the federal funds rate increasing to 2.75 percent to 3 percent by the summer of 2019.

The volatility seen in equity markets in the second half of 2018 will likely accelerate into next year, as projections of slower growth come to fruition, according to Vanguard.

The risk of corrections in equity markets will be higher than with most fixed-income portfolios.

Vanguard's 10-year outlook puts U.S. fixed-income returns in the 2.5 percent to 4.5 percent range, which is an improvement from the firm's projection last year, but still below the historical average of 4.7 percent.

Risk of overly aggressive Fed, escalating U.S. – China tensions

The greatest risk to the U.S. economy in the near term is an overly aggressive Federal Reserve.

Were the Fed to raise the overnight rate beyond 3 percent in 2019, the odds of the U.S. economy falling into recession in 2020 would significantly increase, the report says.

Escalating U.S.-China trade tensions also present a risk to global growth.

For retirement savers, the “challenging” 10-year outlook on investment returns will require increased saving rates, less spending, and continued oversight of investment costs.

“Vanguard believes investors should continue to adhere to time-tested investment principles such as maintaining a long-term focus, employing a disciplined asset allocation, and conducting periodic portfolio rebalances,” the firm said in a statement.

Instant Insights /

2019 market outlook: Slower growth, but no recession, says Vanguard

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