Low interest rates, inflation and volatility have led to an elongated period of slow but steady economic growth in the post-recession era. Though the modest incline may be in jeopardy as Vanguard Group offered its most guarded outlook on the economy in a decade, forecasting higher risks and lower returns for investors, writes Jeff Blumenthal for the Philadelphia Business Journal.
In its 2018 Economic and Market Outlook, the Malvern-based investment management giant said wage or inflation increases could lead markets to reprice a more aggressive path of policy rate normalization by the Federal Reserve, ending a long period of low volatility.
The firm sees U.S. stock returns of 3 percent to 5 percent and 5.5 percent to 7.5 percent for non-U.S. equity markets.
Joseph Davis, Vanguard’s global chief economist, said the most pronounced risk to the status quo resides in the United States, where an already tight labor market will grow tighter, driving the unemployment rate well below 4 percent. This, followed by a cyclical uptick in wages and inflation, should justify the Federal Reserve’s raising rates to at least 2 percent by the end of 2018.
Expectations of additional rate hikes would inevitably follow, which Vanguard said would end an era of extraordinary monetary support in the United States and possibly leading markets to price in more aggressive normalization plans elsewhere. None of this is status quo.
Davis said based on current metrics, businesses and consumers should be as confident about the direction of the economy as they were during the boom times of the early 2000s. But it doesn’t feel similar to the pre-recession period for a few reasons.
Technology is always a disruptor, but the pace of that change has quickened in the post-recession years. And with change comes anxiety. Income gains are higher but not shared equally across economic classes. And scars from the global economic crisis have not left people’s minds
“We’ve gotten to a better place but it hasn’t been quick,” Davis said. “Anyone who owned a business in the 1980s will tell you that when the recession ended, there was a rapid recovery afterwards. That wasn’t the case this time around.”
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