Outside the epidemic: What to expect from stocks, bonds

Compared to our forecast for early 2020, our long-term return outlook for stocks is higher because valuations have fallen amid market declines. On the other hand, an already challenging environment for bonds has probably been given more so that yields have been even lower.

The method of our forecasting

“When we evaluate the effectiveness of the Vanguard Capital Markets Model (VCMM), we have a fairly good record of anticipating average earnings over the next ten years,” said Kevin de Siorcio, senior investment strategist at Vanguard who manages the model.

VCMM is a proprietary statistical tool that analyzes the historical historical relationship between macroeconomic and financial market data that returns assets, such as inflation, interest rates, and equity valuations. Vanguard strategists apply simulation strategies that determine the probability of future asset return outcomes based on current market conditions. The modeling process results in the distribution of projected potential for asset class returns and a correlation structure between assets, which can be used to mimic the behavior of portfolio returns.

Considering predictability and uncertainty

“It’s like noticing something that sets our market forecast apart,” he said. DeSurcio said. “We don’t play pundits, guessing where the markets might be in a month or three.” Rather, he said, the VCMM forecast is for an annual return on the ten-year horizon, which reflects Vanguard’s long-term vision that investors should have a long-term outlook. Moreover, our research shows that we can expect reasonable levels of accuracy within this period.

“We don’t even predict pinpoint,” Mr. DeSurcio also mentioned. “Instead, we offer a potential range of potential returns. We believe that predictions are best seen within a possible framework that acknowledges the inherent uncertainty of predicting the future.

Relevance of portfolio construction

The VCMM model practically simulates how a portfolio can behave over time in asset return distribution and their relationship with other asset divisions. So it can be a valuable asset to explain the risk-return trade-offs of different portfolio choices, which can help investors make asset allocation decisions. It can help investors set reasonable return expectations and determine the likelihood of achieving their investment goals.

The difference of a few months has changed our economic outlook

When we published Our economic and market outlook for 2020, We expected that most major economies would grow more slowly than in recent years but not stagnate. Since then, the epidemic has shut down huge parts of that economy, leading to a historic historic decline in their production and rising unemployment. It has created a platform for most major economies, including the United States, to negotiate for the full year.

Our model is now saying that about returning our assets

We take a long-term view of investing and we encourage our clients to do the same. That’s why we see annual returns over a ten-year period. Generally, you wouldn’t expect our forecast to change in many quarters or even year after year.

However, when we launched VCMM with data in late March 2020, our outlook for equities improved from our forecast in December, thanks to a more favorable valuation of stock prices since then. The table below shows that our annual nominal return estimates for US equities for the next ten years range from 5.5% to 7.5%.

Returns for non-US equities may be higher over the next ten years, ranging from about 8.5% to 10.5%, a difference compared to US stocks that present the advantage of international diversification. (Although equity markets have recovered somewhat since the end of March, their valuations are significantly lower than at the end of last year.)

Expected ten year annual stock returns and volatility levels

Note: The forecast coincides with the distribution of 10,000 VCMM simulations for a ten-year annual nominal return in US dollars from March 1, 2020. Moderate volatility is the 50th percentile of the distribution of the annual standard of an asset class.
Source: Vanguard.
Important: Estimates and other information produced by VCMM about the probability of different investment outcomes are speculative, do not reflect actual investment outcomes and do not guarantee future outcomes. Distribution of return results from VCMM obtained from 10,000 simulations for each modeled asset class. March 1 Simulation until March 2020. The results obtained from the model may vary with each use and over time. For more information, please see the Important Information section at the bottom of the page.

On the other hand, the range of fixed income returns was lower than what we disclosed in December, which reflects the decline in both the central bank’s policy rate and bond yields. The table below shows our ten year annual nominal return estimates. They are slightly lower at 0.9% to 1.9% for US bonds and 0.7% -1.7% for non-US bonds.

Expected ten-year annual fixed income and level of volatility

The picture shows that the volatility in the medium term over the next decade is as follows: 2.4% for U.S. inflation, 1.0% for U.S. cash, 4.3% for U.S. Treasury, 6.1% for U.S. credit, 11.4% for U.S. high-yielding corporate bonds, and 3.3% for U.S. overall bonds. , Hedging US ২ 2.2% for former US bonds worldwide and 7.% for US Treasury inflation-related bonds.  It also shows that the expected annual average median return range for the next decade is as follows: 0.5% to 1.5% for U.S. inflation, 0.6% to 1.6% for U.S. cash, 0.4% to 1.4% for U.S. Treasury, 1.8% to 2.8 for U.S. credit. %, 4.8% to 5.8% for U.S. high-yielding corporate bonds, 0.9% to 1.9% for U.S. overall bonds, 0.7% to 1.7% for global former U.S. bonds hedged in U.S. dollars, and 0.2% to 1.2% for U.S. Treasury inflation-linked bonds. %.Note: The forecast coincides with the distribution of 10,000 VCMM simulations for a ten-year annual nominal return in US dollars from March 1, 2020. Moderate volatility is the 50th percentile of the distribution of the annual standard of an asset class.
Source: Vanguard.

Different perspectives, familiar investment advice

Stocks may perform better in the next decade than we forecast at the end of last year, although fixed earnings returns may be a more nuanced term.

However, our update should not be taken as a signal of a deadline or a regular reversal of your portfolio (which may be based on recent market movements) or a change in your risk tolerance. Nor is it a call to abandon high-quality bonds, which we hope will play an important role as a ballast of risky assets in diversified portfolios.

We hope that investors already have a good investment plan that is designed to carry them through the good market and the bad will have their discipline and vision to stay committed.


All investments are at risk, including the potential loss of money you invest.

Diversity does not guarantee gain or protect from loss.

Investing in bonds is subject to interest rates, credit and risk of inflation.

Investments in stocks or bonds issued by non-US companies are subject to country / regional risks and currency risks.

Important: Estimates and other information produced by the Vanguard Capital Markets model about the probability of different investment outcomes are speculative in nature, do not reflect actual investment results and do not guarantee future outcomes. VCMM results will vary with each use and time.

VCMM estimates are based on a statistical analysis of historical data. Future income may behave differently from the historical patterns contained in the VCMM. More importantly, VCMM can underestimate the unselected extreme negative situations in the extreme historical period on which the model is based on assumptions.

Vanguard Capital Markets Model: A proprietary financial simulation tool developed and maintained by Vanguard’s initial investment research and consulting team. The model predicts future income distribution for a wide array of broad asset classes. This asset class includes the U.S. and international equity markets, several maturities of the U.S. Treasury and the corporate fixed income market, the international fixed income market, the U.S. money market, commodities and specific alternative investment strategies. The theoretical and empirical basis for the Vanguard Capital Markets model is that the returns of different asset classes reflect the compensation required by investors to bear different types of systematic risk (beta). The core of the model includes estimates of the dynamic statistical relationship between risk factors and asset returns, derived from statistical analysis based on monthly financial and economic data available since the early 1960s. Using a method of inferential equations, the model then uses the Monte Carlo simulation method to highlight the causes of risk and the approximate correlation between asset classes and uncertainty and chaos over time. The model often generates a large set of simulated results for each asset class on the horizon. In this simulation the prediction is obtained by calculating the measure of the central tendency. The results produced by the tool will vary with each use and time.

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