|

The volatility seen in equitymarkets in the second half of 2018 will likely accelerate into nextyear, as projections of slower growth come to fruition, accordingto Vanguard. (Photo: Shutterstock)

|

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

|

But boomers and Gen Xers playing the catch-up game with theirretirement portfolios will see stingier returns over the nextdecade, particularly in equities.

Lower returns on global equities, U.S. GDP to slow to2%

Vanguard is projecting annual returns on global equities willaverage 4.5 percent to 6.5 percent for the 10-year period, comparedto the 12.6 percent of annual gains in equities experienced sincethe financial crisis.

|

Vanguard, which managed $3.46 trillion in assets at the end of2017, including $381.5 billion in target-date fund assets, sees theglobal economy growing for the next two years, albeit at a slowerrate.

|

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

Low unemployment, increasing wages, but no runawayinflation

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

|

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

|

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

|

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

|

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

|

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

|

Vanguard's 10-year outlook puts U.S. fixed-income returns in the2.5 percent to 4.5 percent range, which is an improvement from thefirm's projection last year, but still below the historical averageof 4.7 percent.

Risk of overly aggressive Fed, escalating U.S. – Chinatensions

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

|

Were the Fed to raise the overnight rate beyond 3 percent in2019, the odds of the U.S. economy falling into recession in 2020would significantly increase, the report says.

|

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

|

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

|

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

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.