Market perspectives: February 2020

23 January 2020 | Markets and economy



The House of Commons passed the European Union (Withdrawal Agreement) Bill on January 9, and the House of Lords is expected to follow suit, setting the stage for the United Kingdom’s exit from the E.U. on January 31.

While a transitionary period is set to last through December 2020, Vanguard believes this won’t be long enough to complete trade negotiations. In our view, the U.K. and E.U. will negotiate over a one- to two-year transitionary period, and a no-deal Brexit at the end of 2020 remains possible. The Vanguard 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 under a variety of scenarios.

U.S. government shutdown

Congress passed, and President Donald Trump signed on December 20, two bills that provide $1.4 trillion in government funding through September 30, 2020, eliminating the potential for a U.S. government shutdown in the immediate future.

Economic growth

Vanguard expects global growth to continue to soften over the next 12 months, owing to trade tensions, policy uncertainty, and fading U.S. fiscal stimulus. Vanguard presents its rationale in the Vanguard economic and market outlook for 2020: The new age of uncertainty (VEMO). We are more bearish than the consensus on our growth outlooks for the United States, the United Kingdom, and China.

As discussed in VEMO, we see GDP growth in the United States falling below trend in 2020, to around 1%. The consumer has carried the weight in the United States, as business investment continued to slump through the fourth quarter of 2019. Business sentiment continues to weaken amid persistent uncertainty, but the housing sector appears to have turned around. Housing starts, the number of residences on which ground was broken, surged to a 13-year high in December, to an annualized rate of 1.61 million. And U.S. home prices rose the most in 19 months in December, by 6.9% to a median of $312,500.

We maintain our expectation for growth in emerging markets of around 4.6% in 2020. We expect emerging markets in Asia, not including China, to continue to be the fastest-growing regions worldwide. We expect most of a rebound from an estimated 3.9% emerging markets growth in 2019 to occur in Latin America, and we see Central and Eastern European economies remaining resilient.

Monetary policy

Vanguard anticipates a modest easing of monetary policy by the U.S. Federal Reserve, the Bank of England, and the Royal Bank of Australia in 2020. We foresee other major developed market central banks remaining on hold for the year, but with risks skewed toward loosening policy. We believe that most emerging markets have room to use monetary or fiscal policy to support growth, though that ability will be restricted for emerging markets with high inflation, low foreign exchange reserves, and political instability.

The U.S. Federal Reserve left the target for its federal funds rate unchanged in December at 1.50% to 1.75%. Vanguard expects the Fed, which cut the target for its federal funds rate by a total of 75 basis points in 2019, to further reduce that benchmark rate by 25 to 50 basis points before the end of 2020. Such a cut would address a deteriorating growth outlook amid persistently elevated policy uncertainty. The Fed meets next on Wednesday, January 29.


The signing of a Phase 1 U.S.-China trade deal. U.S. passage of the United States-Mexico-Canada Agreement. An uptick in global trade leading indicators. News on trade recently seems to have been nothing but good. But perhaps the best news of all has been … an absence of bad news. What comes next, especially around U.S.-China trade, bears watching, given the prominence of trade in Vanguard’s views on both the potential upside and downside risks to the global economy.

The United States and China signed an initial, or “Phase 1,” trade deal on January 15. The agreement removes some immediate uncertainty that has harmed both nations’ economies. Vanguard sees the Phase 1 deal perhaps more appropriately referred to as a “truce,” with follow-through to be assessed over the next three to six months. Phase 2 would tackle issues requiring greater compromise, such as Chinese industrial subsidies and additional regulatory hurdles for U.S. firms seeking to do business in China.

A day after the United States and China signed their deal, the U.S. Senate approved the United States-Mexico-Canada Agreement (USMCA). While the USMCA differs from the predecessor North American Free Trade Agreement (NAFTA) in some key ways, Vanguard believes that market implications of its ratification have more to do with sentiment than with economics. Specifically, ratification would remove the risk of NAFTA being pulled apart without an agreement to take its place.

Even before these developments, signs emerged that global trade was beginning to stabilize. Vanguard noted improvements in eight of its nine key trade variables in January, while U.S. trade leading indicators improved on both the import and export sides. Given the prevailing uncertainty, Vanguard isn’t confident in a trade bounce-back of significant magnitude. But we believe a bottom was reached sometime in the 2019 fourth quarter.


Vanguard’s outlook for global inflation is muted, with slowing GDP and wage growth limiting upward pressure, and making it difficult for developed market central banks to reach their inflation targets.

In the United States, Vanguard believes that core inflation is likely to rise yet remain below the Federal Reserve’s 2% target. The Governing Council of the European Central Bank will be worried about a collapse in medium-term inflation expectations in the euro area, while we expect inflation to hover below target around 1.5% in the United Kingdom among evidence of stagnation in the labor market.


The United States added 145,000 jobs in December, the Bureau of Labor Statistics (BLS) reported, a slightly weaker-than-expected report indicating a gradually slowing labor market. Wage growth decreased slightly while the unemployment rate remained at 3.5%, a level not seen until recently in 50 years. A BLS benchmark revision being implemented this month is likely to revise monthly average job creation in 2019 downward to 180,000.

Vanguard expects a continued moderation this year to a 150,000 average. That would be above the 60,000 to 70,000 jobs required to keep up with population growth and would likely exert downward pressure on unemployment rates. But labor supply isn’t constrained enough yet to add upward pressure to wages as people continue to enter the labor force given ample job opportunities.

Asset class return outlooks

The 10-year annualized nominal return projections, based on market conditions as of December 31, 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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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.