Market perspectives: January 2019

07 January 2020 | Markets and economy



The conservative party won a significant working majority in the United Kingdom’s general election on Thursday, December 12. The result reduces some of the short-term uncertainty around Brexit. Vanguard’s research paper, It’s not EU, it’s me: Estimating the impact of Brexit on the UK economy, presents Vanguard’s findings on the potential effects of Brexit. 

Money markets 

Activity in repo markets frequently increases at quarter-ends, when balance sheet adjustments place cash in great demand. Interest in the repurchase agreement, or “repo”, market will be especially keen at the end of this year after a significant mismatch in supply and demand for cash two months ago. While the approaching year-end may herald more volatility, Vanguard sees an opportunity for money market funds in position to serve as repo market lenders.

Economic growth 

An increasingly unpredictable policy environment is undermining economic activity globally through postponed investments and declines in production. In the year ahead, Vanguard doesn’t foresee a significant reversal in trade tensions or that policymaking will become more predictable. This new age of uncertainty will act as a drag on demand; if it persists, long-run potential growth will be lower.   

We see growth in the United States falling below trend in 2020, with the risk of recession still elevated. Should job growth slow further than we expect and, in turn, if income gains lose momentum, we see a strong case for GDP growth near the lower end of our forecast range of 0.5% - 1.5%. 

Economic growth in Mexico has softened amid heightened uncertainty and tight monetary conditions both domestically and globally, a slowdown exacerbated by low public and private investment. We expect GDP growth to recover to 2.3% by the fourth quarter of 2020 amid strengthening consumption. But risks to growth are to the downside given global trade uncertainty, which could worsen and affect Mexico’s fiscal sustainability through a weakened peso. 

Monetary policy 

Vanguard believes that the pivot to looser policy by central banks around the world will persist in an environment of low growth and low inflation. Despite increased doubts about the effectiveness of monetary policy, we expect central banks to continue to adopt unconventional measures. 


Vanguard believes that increasing policy uncertainty was the primary driver of a deterioration in global growth in 2019, especially that related to trade. In the year ahead, despite headlines that may swing from optimistic to dire and back again, we don’t foresee any immediate reversal of tariff escalation or a meaningful resolution to broader trade and geopolitical tensions. 


For years, the inflation expectations held by consumers and financial markets have fallen short of modest policy targets, implying increasing doubts about the effectiveness of monetary policy. These low inflation expectations support our outlook for subdued global inflation trends. 


In the United States, the headline jobs number has been strong, but it’s an outlier among other labor market indicators that still indicate a slowing job market. Business surveys points to a slowdown in the pace of hiring in 2020. Even without this drag, we had expected the pace of monthly job creation to fall closer to 100,000 per month in 2020. 

Asset class return outlooks 

The 10-year annualized nominal return projections, based on market conditions as of September 30, 2019, are as follows:

U.S. equities 3.5% - 5.5%
Global equities ex-U.S. (unhedged) 6.5% - 8.5%
U.S. real estate investment trusts 2.5% - 4.5%
U.S. growth 2.5% - 4.5%
U.S. value 6.0% - 8.0%
U.S. large-cap 3.5% - 5.5%
U.S. small-cap 4.5% - 6.5%
U.S. bonds 2.0% - 3.0%
U.S. Treasury bonds 1.5% - 2.5%
Global bonds ex-U.S. (hedged) 1.5% - 2.5%
U.S. credit bonds 2.5% - 3.5%
U.S. high-yield corporate bonds 3.0% - 4.0%
U.S. Treasury inflation-protected securities 1.0% - 2.0%
U.S. cash 1.5% - 2.5%

These probabilistic return assumptions are from a U.S. investor’s perspective. They depend on current market conditions and, as such, may change over time.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of June 30, 2019. Results from the model may vary with each use and over time.

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All investing is subject to risk, including possible loss of the money you invest.

Investments in bonds are subject to interest rate, credit, and inflation risk.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S.Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.