Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
2025 economic and market outlook
Vanguard Perspective
December 11, 2024
The global monetary
easing cycle will be in full swing in 2025, with inflation in most developed
economies now within touching distance of central banks’ targets. The good
fortune of high productivity growth and a surge in available labor has
propelled the U.S. economy, while other economies have been less lucky. The
potential for these positive supply-side factors to wane is a key risk to our
U.S. outlook, though expansionary fiscal policy may cushion any negative impact
on growth.
PDF
Vanguard
economic and market outlook for 2025
We reemphasize the view we put forth a year ago, that an era of
sound money—with interest rates above the rate of inflation—lives on. That
said, markets face a growing point of tension: Assets with the strongest
fundamentals have the most stretched valuations, and vice versa. Short-term
economic and policy risks will help determine whether momentum or valuations
dominate investment returns in 2025.
Figure 1: Vanguard’s 2025 economic forecasts
|
|
GDP growth |
Unemployment rate |
Core inflation |
Monetary policy |
||||
|
Country/region |
Vanguard 2025 |
Trend |
Vanguard 2025 |
NAIRU |
Vanguard
2025 |
Year-end 2024 |
Year-end 2025 |
Neutral rate |
|
U.S. |
2.1% |
2.7% |
4.4% |
4.5% |
2.5% |
4.5% |
4.0% |
3.5% |
|
Euro area |
0.5% |
1.2% |
6.9% |
6.5%–7.0% |
1.9% |
3.0% |
1.75% |
2.0%–2.5% |
|
U.K. |
1.4% |
1.2% |
4.4% |
4.0%–4.5% |
2.4% |
4.75% |
3.75% |
3.0%–3.5% |
|
China |
4.5% |
4.2% |
5.1% |
5.0% |
1.5% |
1.4% |
1.2% |
4.5%–5.0% |
|
Japan |
1.2% |
1.0% |
2.4% |
2.5%–3% |
2.1% |
0.5% |
1.0% |
0% |
Notes: Forecasts are as of
December 2, 2024. For the U.S., GDP growth is defined as the year-over-year
change in fourth-quarter GDP. For all other countries/regions, GDP growth is
defined as the annual change in GDP in the forecast year compared with the
previous year. Unemployment rate forecasts are the average for the fourth
quarter of 2025. NAIRU is the nonaccelerating inflation rate of unemployment, a
measure of labor market equilibrium. Core inflation excludes volatile food and
energy prices. For the U.S., euro area, U.K., and Japan, core inflation is
defined as the year-over-year change in the fourth quarter compared with the
previous year. For China, core inflation is defined as the average annual
change compared with the previous year. For the U.S., core inflation is based
on the core Personal Consumption Expenditures Index. For all other
countries/regions, core inflation is based on the core Consumer Price Index.
For U.S. monetary policy, Vanguard’s forecast refers to the top end of the
Federal Open Market Committee’s target range. China’s policy rate is the
seven-day reverse repo rate. The neutral rate is the equilibrium policy rate at
which no easing or tightening pressures are being placed on an economy or its
financial markets.
Source: Vanguard.
Balance of risks favors bonds
Higher starting
yields have greatly improved the risk-return tradeoff in fixed income. Bonds
are still back. Over the next decade, we expect 4.3%–5.3% annualized returns
for both U.S. and global ex-U.S. currency-hedged bonds. This view reflects a
gradual normalization in policy rates and yield curves, though important
near-term risks remain.
Figure 2: Vanguard’s outlook for financial markets
Our 10-year annualized nominal return projections are as
follows. They are based on a November 8, 2024, running of the Vanguard Capital
Markets Model® (VCMM). The figures are based on a 2-point range around the 50th
percentile of the distribution of return outcomes for equities and a 1-point
range around the 50th percentile for fixed income. More extreme returns are
possible.
|
Equities |
Return projection |
Median volatility |
|
U.S. equities |
2.8%–4.8% |
16.9% |
|
U.S. value |
4.2%–6.2% |
19.2% |
|
U.S. growth |
Negative 0.4%–1.6% |
17.8% |
|
U.S. large-cap |
2.5%–4.5% |
16.5% |
|
U.S. small-cap |
4.2%–6.2% |
22.4% |
|
U.S. REITs |
3.8%–5.8% |
20.1% |
|
Global equities ex-U.S. (unhedged) |
6.9%–8.9% |
18.5% |
|
Global ex-U.S. developed markets equities (unhedged) |
7.3%–9.3% |
16.8% |
|
Emerging markets equities (unhedged) |
5.2%–7.2% |
26.1% |
|
Fixed income |
Return projection |
Median volatility |
|
U.S. aggregate bonds |
4.3%–5.3% |
5.7% |
|
U.S. Treasury bonds |
4.1%–5.1% |
6.0% |
|
U.S. intermediate credit |
4.6%–5.6% |
5.2% |
|
U.S. high-yield corporate |
5.3%–6.3% |
10.1% |
|
U.S. TIPS |
3.4%–4.4% |
5.1% |
|
U.S. cash |
3.1%–4.1% |
1.4% |
|
Global bonds ex-U.S. (hedged) |
4.3%–5.3% |
4.5% |
|
Emerging markets sovereign |
5.0%–6.0% |
9.8% |
|
U.S. inflation |
1.9%–2.9% |
2.4% |
IMPORTANT: The
projections or other information generated by the Vanguard Capital Markets
Model regarding the likelihood of various investment outcomes are hypothetical
in nature, do not reflect actual investment results, and are not guarantees of
future results. Distribution of return outcomes from the VCMM are derived from
10,000 simulations for each modeled asset class. Simulations are as of November
8, 2024. Results from the model may vary with each use and over time. For more
information, please see the Notes section.
We believe that yields across the curve are likely to remain
above 4% in the U.S. A scenario where supply-side tailwinds persist will be
supportive for trend growth and thus real rates. Alternatively, the emerging
risks related to global trade and immigration policies would also keep rates
high due to increased inflation expectations. These risks must be balanced with
the possibility that a growth shock, and any associated monetary easing or
“flight to safety,” would cause yields to fall meaningfully from current
levels.
Higher starting yields, which imply a “coupon wall,” mean that
future bond returns are less exposed to modest increases in yields. In fact,
for investors with the time horizon to see coupon payments catch up, interest
rates that rise further would improve their total returns despite some
near-term pain. We continue to believe fixed income plays an important role as
a ballast in long-term portfolios. The greatest downside risk to bonds also
pertains to stocks—namely, a rise in long-term rates due to continued
fiscal-deficit spending or removal of supply-side support. These are the
dynamics we are most closely monitoring.
Rational or irrational exuberance: Only time will tell
U.S. equities have generally delivered strong returns in recent
years. 2024 was no exception, with both earnings growth and price/earnings
ratios exceeding expectations. The key question for investors is, “What happens
next?”
In our view, U.S. valuations are elevated but not as stretched
as traditional metrics imply. Despite higher interest rates, many large
corporations insulated themselves from tighter monetary policy by locking in
low financing costs ahead of time. And more importantly, the market has been
increasingly concentrated toward growth-oriented sectors, such as technology,
that support higher valuations.
Nevertheless, the likelihood that we are in the midst of a
valuation-supporting productivity boom, akin to the mid-1990s, must be balanced
with the possibility that the current environment may be more analogous to
1999. In the latter scenario, a negative economic development could expose the
vulnerability of current stock market valuations.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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