Vanguard’s Economic And Stock Market Outlook For 2017

Vanguard’s Economic and Stock Market Outlook for 2017 by John Szramiak was originally published on Vintage Value Investing

Vanguard recently released their Economic and Stock Market Outlook for 2017, a 40-page report detailing what you should generally expect as an investor in 2017. Vanguard is saying that we should expect stabilization and slow growth in the global economy – and not the extremes of stagnation or acceleration. You can read the full report by clicking here.

Vanguard

Here are the main takeaways from the report:

Global Economy

Low growth but not stagnation.

Since the end of the Great Recession, economic growth has been slow and disappointing. Some people believe the world is headed for Japanese-style secular stagnation. And yet the modest global economy – as weak as it’s been at times – has endured.

  • Vanguard anticipates “sustained fragility” for global trade and manufacturing.
  • The growth outlook for developed markets remains modest but steady.
  • Increasingly sound economic fundamentals (supported by U.S. and European policy) should help offset weakness in the U.K. and Japan.
  • In the U.S., 3% GDP growth is possible in 2017, despited cooling job growth.
  • Vanguard still believes that long-term U.S. growth of 2% is neither “subpar” nor something “new”, if you take into account lower population growth currently and the exclusion of the consumer-debt-fueld boost to growth between 1980 and the Great Recession.

Inflation

Better than expected inflation in the U.S. and the U.K., slower inflation in the Eurozone.

  • Many developed economies are likely to struggle to consistently achieve 2% core inflation over the medium term.
  • Nevertheless, the most pernicious deflationary forces are waning.
  • U.S. core inflation should modestly overshoot 2% in 2017, prompting the U.S. Federal Reserve to continue to raise rates.
  • U.K. inflation should also overshoot following the post-Brexit depreciation of the pound.
  • By contrast, inflation in the Eurozone will only return to target levels gradually.

Monetary Policy and Interest Rates

The U.S. Fed will continue to tighten rates. In the rest of the world, stimulus is still possible but will have less of an affect. Monetary policy in China is important but will be difficult in 2017.

  • The U.S. Fed is likely to continue to tighten, raising rates to 1.5% in 2017 but leaving the fed funds rate below 2% through at least 2018.
  • Throughout the rest of the world, monetary stimulus is still possible, but its benefits may be waning (and negative interest rates could be potentially harmful).
  • Still, the European Central Bank and the Bank of Japan could add to the quantitative easing they implemented in 2016.
  • Chinese policymakers might have the most difficult task of engineering a “soft landing” by lowering borrowing costs and the real exchange rate, without accelerating capital outflows from the country.
  • The margin of error in China is slim, and Vanguard expects policymakers to continue to provide fiscal stimulus to the economy in 2017.
  • The most important policy measure to look out for in China is the pace of reforms for the country’s state-owned enterprises, which are currently key sources of over-investment and excess capacity, which is slowing growth.

Investment Outlook

Not great given the low-rate environment, but still positive.

Vanguard’s outlook for global stocks and bonds is the most cautious it’s been in a decade, given fairly high equity valuations and the low-interest-rate environment. Global bond yields aren’t expected to increase much in 2017.

  • Bonds: Return outlook remains positive yet muted. The 10-year U.S. Treasury yield is still expected to be within the 2.00%-2.25% range.
  • Stocks: The medium-term outlook for global equities is in the 5-7% range (we’ve seen over the past several years that low economic growth doesn’t have to mean poor equity returns). Still, the long-term outlook is not bearish and can even be viewed as a positive when taking into account the low-rate environment.

Summary

By late 2016, market sentiment had quickly shifted from an overly pessimistic outlook of weak stagnation to an overly optimistic expectation of growth. Both views are incorrect.

Global growth should stabilize, not stagnate. Tightening labor markets should place modest upward pressure on otherwise low inflation. But further monetary stimulus (like negative interest rates) will prove unproductive in spurring growth.

Vanguard’s outlook for returns is modest compared with the heady returns experiences since the depths of the Global Financial Crisis. This guarded (but not bearish!) outlook is unlikely to change until short-term rates get a little higher and valuation metrics become more favorable.


The Little Book of Common Sense Investing by John C. Bogle

“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.” – Warren Buffett.

The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, Michael LeBoeuf; Foreword by John C. Bogle

The Boglehead’s Guide to Investing is a DIY handbook that espouses the sage investment wisdom of John C. Bogle. This witty and wonderful book offers contrarian advice that provides the first step on the road to investment success, illustrating how relying on typical “common sense” promoted by Wall Street is destined to leave you poorer. With warnings and principles both precisely accurate and grandly counterintuitive, the Boglehead authors show how beating the market is a zero-sum game.

Article by Vintage Value Investing



About the Author

VintageValueinvesting
Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…