US Recession Risk Rises, But Yields Should Improve – Vanguard

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NEW YORK — Vanguard Group, the world’s second-largest asset manager, said on Wednesday that the U.S. economy was increasingly likely to slide into recession over the next two years, but raised its return expectations annual stocks and bonds.

The Pennsylvania-based mutual fund manager noted a 25% chance of a US recession over the next 12 months and 65% over the next two years. In the euro zone, the probability of a recession is about 50% over the next year and 60% over the next two years, he estimated.

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Vanguard expects the U.S. economy to grow 1.5% this year, down from its previous forecast of 3.5%, it said in a mid-term update. year of its economic and market outlook for 2022.

“Central banks have been forced to play catch-up in the fight against inflation, raising interest rates faster and possibly higher than expected. But these actions risk chilling economies to the point that they are entering a recession,” Vanguard said.

Recession fears have risen as the US Federal Reserve tightens monetary policy, with some Wall Street banks raising expectations of an economic slowdown in recent weeks.

The S&P 500 index is down 20% this year while US government bonds are on track for their worst year on record, according to an ICE BofA index that is down nearly 10% this year.

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“There is an upside and downside market: due to the current decline in equity valuations and rising interest rates, our model suggests expected long-term returns higher than our forecast at the end of the year,” Vanguard said.

Last month, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point, its biggest hike since 1994. It is widely expected to hike similar interest rates later this month to rein in inflation, which is at 40-year highs. .

Vanguard expects the target federal funds rate to be between 3.25% and 3.75% by the end of the year, roughly in line with Fed projections and government expectations. market. But he said the rate would hit at least 4% next year, higher than current market estimates.

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While higher rates and growing recession worries weighed heavily on bonds and equities in 2022, Vanguard’s outlook for long-term investment returns has improved since late last year.

“There’s been a deterioration in valuations, so valuations have become more attractive, whether that’s higher yields or lower price-to-earnings multiples in equity markets,” said Andrew Patterson, economist Vanguard’s senior international, in an interview.

The ten-year annualized return forecast for US equities now ranges from 3.4% to 5.4%, compared to 2% to 4% at the end of 2021. For US bonds, the forecast is 3% to 4 %, against 1.5% to 2.5%. percent at the end of last year, Vanguard said.

The improving outlook for bonds means they will continue to offer investors diversification using strategies such as the 60/40 portfolio, a standard approach that keeps 60% of assets in equities and 40% in fixed income. , Patterson said.

“We’re more constructive on fixed income yields going forward, unfortunately due to some of that yield boost we’ve been feeling,” he said. (Reporting by Davide Barbuscia; Editing by Richard Chang)

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