Investors do benefit from taking note of long-term trends that stand to
influence our economies and markets in the years to come. Vanguard watches
these trends closely, and we discussed our assessment in our recent
2017 global economic and market outlook.
Our outlook: Expect stabilization, not stagnation
One trend in particular that we’re watching is the low-growth,
low-interest-rate environment that has marked the global economy since the
2008-09 financial crisis. We don’t think this economic backdrop was simply
the result of cyclically weak demand or long-term stagnation.
Instead, certain structural forces are contributing: Falling technology
costs are limiting businesses’ capital spending, an aging population is
weighing on growth in the developed world, and the free movement of capital
and products across the globe is suppressing prices and wages. And –
despite some of the enthusiasm we’ve seen in markets lately, particularly
in the United States – these forces are likely to continue to dampen
growth, inflation, and interest rates.
I realize this all may sound gloomy, but that’s not how we see it. We
expect global growth to stabilize at more modest levels, not stagnate. The
world isn’t headed for Japanese-style deflation, in which a widespread
sustained drop in prices puts economic activity into hibernation.
In fact, we believe that global growth could pick up modestly over time.
Our expectation is based on a potential rebound in productivity as new
digital technologies get used more effectively. We also anticipate a slight
recovery in the labour force as the baby-boom generation finishes its
transition to retirement, nudging up demand for workers.
Prepare for subdued returns
And what about prospects for the markets? Vanguard’s outlook for global
stocks and bonds remains the most guarded in 10 years, given fairly high
equity valuations and the current interest-rate environment.
This outlook isn’t bearish but is actually fairly positive when you take
into account interest rates that are still low by historical standards.
Making sense of uncertainty amid the future’s shifting tides
Significant trends often unfold gradually. Like shifting tides, they’re
sometimes barely noticeable at first but ultimately can end up changing the
landscape entirely. Other times, apparent trends recede before they have
much of a long-term impact. That’s what can make the future so hard to
predict. It’s also why you should be skeptical of definitive, pinpoint
projections about what’s going to happen.
I know that some investors, especially in the wake of a year marked by
political surprises in the United States, United Kingdom, and elsewhere,
would prefer a little more certainty. But such certainty is bound to be
just an illusion.
As Warren Buffett – whose recent shareholder letter featured
kind words for Vanguard’s founder – likes to say, “Uncertainty is the friend of the buyer of long-term
F. William McNabb III is Chairman and Chief Executive Officer of Vanguard Group Inc.
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