The odds of a recession are rapidly going up, and U.S. stock market investors need to be on notice.
Investors who’ve been rolling in the money because of the decade-long bull market may need to start making some adjustments to their strategies. That’s because of the increasing likelihood of a global recession hitting the markets in the next two years.
This dire warning came from Vanguard Chief Investment Officer Greg Davis. He spoke at the annual Inside ETFs conference in Hollywood, FL, and he also shared his thoughts on CNBC.
Davis acknowledged that the stock market has had a good run so far this year considering it was in bear territory during the fourth quarter of 2018. However, he said that the firm is predicting that returns will go down.
“If we look forward for the next 10 years, our expectations around U.S. equity markets is for about a 5% median annualized return over the next decade. That’s lower. Five years ago, we’d have been somewhere in around 8%. So our expectations have clearly come down when it comes to the U.S. equity markets’ expectations.”
Pivoting to corporate earnings, Davis said Vanguard is a little more optimistic. He said he believes earnings growth will be in the mid-single digits. Earlier this month, CCN.com reported that for the first time since 2016, U.S. corporate earnings are projected to drop by 0.8% per share in the first quarter of 2019.
However, at the time of the reporting, the projection had no visible impact on the Dow Jones and the rest of the U.S. stock market.
That may change, however. David Rosenberg, the chief economist for Gluskin Sheff, has said stock market losses that occurred at the end of 2018 may have only been the beginning.
“We’re going into a recession. I think it will be this coming year.”
If a recession occurs, some investors may be tempted to dabble in cryptocurrency or another alternative asset class. However, legendary venture capitalist Fred Wilson said 2019 might be a “doozy” for both traditional and crypto markets. Cryptocurrency won’t be a “safe haven” amidst global uncertainty, but:
“The U.S. equity capital markets enter 2019 on shaky ground. Though the last week of the year brought us a relief rally, the markets are dealing with higher rates, some early indications of a weaker economy in 2019.”
When explaining the pressures the markets are under, Vanguard’s Davis said they face a tough fight – similar to the many endured by Rocky Balboa. In bringing up the fictional boxer, Davis said this fight could continue if the markets “ultimately ride out the year.”
“Even when Rocky wins the fight he takes a pretty ugly beating along the way. His down-but-not-out attitude truly aligns with our U.S. and global economic outlook,” he said, adding that the $5 trillion-plus asset manager isn’t expecting anything quite as dramatic as a boxing match.
All joking aside, Davis said the odds of a recession occurring this year had jumped to 35% from 30%. He added that the chances for a recession in 2020 range from 40% to 50%.
On global growth, Davis said Vanguard’s outlook is flatted muted.
“In the U.S., we’re expecting growth in 2019 to be around 2%. We’re expecting growth of about a percent or so in Europe. And we’re expecting China to slow down to about 6%.”
Vanguard itself has been positioning more defensively on active credit, expecting the yield curve to steepen as the Federal Reserve nears the end of its rate-rising cycle, according to Bloomberg.
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Last modified: September 23, 2020 12:27 PM