By late 2016, market sentiment had quickly shifted from an overly pessimistic outlook of cyclically weak stagnation toward an overly optimistic expectation of a growth acceleration. Both views are incorrect.
Global growth should stabilise, not stagnate. Ever-tightening labor markets should place modest upward pressure on otherwise low inflation. And further monetary stimulus (i.e., negative interest rates) will prove unproductive in spurring unlevered growth. Global bond yields are unlikely to rise materially higher until the major economies address structural impediments to higher productivity growth. The risks to the consensus outlook vary notably across markets.
Vanguard’s outlook for portfolio returns is modest compared with the heady returns experienced since the depths of the Global Financial Crisis. This guarded, but not bearish, outlook is unlikely to change until we see a combination of higher short-term rates and more favorable valuation metrics. In some ways, the investment environment for the next five years may prove more challenging than the previous five, underscoring the need for discipline, reasonable expectations, and low-cost strategies.
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