Vanguard Chief Global Economist Joe Davis is forecasting that global and emerging market equities will outperform U.S. equities by at about 2% over the next decade.
Davis said in a note to investors that he expects the average, annualized global equities return (minus U.S. stocks) to be in the 6.7% to 8.7% range, while he forecasts the U.S. equity return will be 4.4% to 6.4% over the next 10 years.
In comparison, global equities in developed markets are expected to return 6.5% to 8.5% and emerging market equities are expected to return 6.3% to 8.3% over the next decade, Davis said.
Vanguard also sees a good chance of a U.S. recession sometime this year.
“We continue to assign a high probability to a mild recession in 2023, though the odds of continuing economic growth—a 'soft landing' from the Fed’s efforts to quell inflation—have risen,’ Davis said.
“We continue to expect the Fed to increase its rate target by a total of 50 basis points over its next two meetings (in March and May), to a range of 5%–5.25%, and to keep it there through year-end."
U.S. small cap stocks are projected to outperform U.S. large cap stocks, but only slightly, with a 4.7% to 6.7% forecast for the decade—compared to U.S. large cap performance of 4.3% to 6.3%.
Despite housing shortages, even U.S. real estate investment trusts are forecast to return 4.6% to 6.6% over the decade, Davis said.
Davis expects U.S. aggregate bonds to pay a projected 4% to 5%, with Treasury bonds paying an average of 3.6% to 4.6% and Treasury Inflation-Protected Securities (TIPS) forecast to return 3% to 4% over the next 10 years.
U.S. credit bonds are projected to pay an average annualized 4.5% to 5.5%, with U.S. high-yield bonds projected to pay more—6.1% to 7.1%—in exchange for the higher risk of default investors take on, he said.
On the global stage, international bonds (minus U.S. exposure) are forecast to pay 3.9% to 4.9%, with emerging market sovereign bonds paying an average annualized return of 5.6% to 6.6%.
On the U.S. economy, Davis said the labor market continues to defy the Fed's attempts at dousing inflation.
The nearly year-long, 450-basis-point cycle of interest rate hikes by the Federal Reserve “hasn’t materially affected the labor market,” he said, pointing to the reported creation of 517,000 jobs in January and the fall in unemployment rate to a 54-year low of 3.4%.
“Changes in monetary policy take time to work through an economy, however, and we expect higher interest rates to cool the labor market in the second quarter. We anticipate job losses in the second half of 2023 and an unemployment rate near 5% by year-end,” Davis said.
Davis said he expects the Consumer Price Index to come down modestly from December’s 6.5% year-over-year rise.
“We expect inflation to subside gradually through 2023, with higher shelter prices in the first half of the year offset to a degree by faster deceleration in goods prices,” Davis added.
Federal Reserve policymakers were nearly unanimous in supporting a 25 basis point interest-rate increase, with a few backing a larger increase, minutes from the most recent Fed meeting show, Reuters reported.
All participants at the Fed meeting indicated rates need to rise, according to the minutes, and several "observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures," Reuters said.