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Equities ‘Frothy,’ Markets Volatile: Vanguard Execs

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More than half of Vanguard investors are looking to boost their equity holdings in 2014, according to a poll taken during a webinar led by the investing giant’s top executives late Thursday.

But the executives — Chairman, CEO and President Bill McNabb and Chief Investment Officer Tim Buckley — urged the 8,600 attendees to proceed carefully.

The poll found that 33% of investors were somewhat likely to increase their equity exposure this year, while 24% were very likely to do so.

“Often, after great returns … people chase them and risk getting in after a run-up. So, don’t overallocate to equities,” Buckley cautioned.

Valuations, he notes, are historically in the top quartile and “are getting pricey.”

In terms of what changes in Fed policy and quantitative easing could mean, McNabb says we are in “unprecedented territory.”

“When something slightly unexpected happens, a lot of volatility enters the market, and there are likely to be disruptions as the end [of QE] works out,” McNabb said. “There are likely to be surprises.”

Vanguard’s financial models project that over the next 10 years, average returns could be in the range of 6%-7%.

Overall, there are positive signs that the United States can move beyond its current 2% economic growth rate, Buckley noted.  

2014 Outlook

Vanguard’s economic and investment outlook, released earlier this week, says the firm’s experts “anticipate that the modest global recovery will likely endure at a below-average pace through a period of low interest rates, continuing high unemployment and debt levels.”

However, the U.S. may be moving toward better-than-trend growth for the first time since the onset of the global financial crisis, it says. “Our economic outlook, in short, is one of resiliency,” the group said in its report.

U.S. economic growth has been 3.2% on average from 1995 to 2007. For the next three years (2014-2016), this growth is expected to be 2.5% on average, Vanguard says.

Europe’s growth was 2.3% from ’95-’07 and is poised to be just 1.6% in the ’14-’16 period. China’s 10% growth from 1995 to 2007 is coming down to 7% for the next few years.

“Market volatility is likely as the Federal Reserve undertakes the multistep, multiyear process of unwinding its extraordinarily easy monetary policy,” Joseph Davis and a team of experts wrote. “Rather than frame this process as a negative, we view it as an indication of increasing economic strength.”

Overall, the group says it is “uneasy about signs of froth in certain segments of the global equity market” and encourages investors to “exercise caution in making strategic or tactical portfolio changes that increase this risk.”

Bond Picture

Vanguard says its outlook for global bonds is muted, but it is boosting its 10-year median nominal return of a for a globally diversified fixed-income portfolio to 1.5% to 3% range versus last year’s 0.5% to 2%.

The group expects “the diversification benefits of fixed income in a balanced portfolio to persist under most scenarios.”

“We believe that the prospects of losses in bond portfolios should be weighed against the magnitude of potential losses in equity portfolios,” it added, “because the latter have tended to exhibit much larger swings in returns.”

Portfolios with 60% stock and 40% bond allocations can anticipate returns of 3% to 5%, adjusted for inflation over the next 10 years.

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