Expect Modest Portfolio Returns in 2017: Vanguard

Looking closer at Vanguard’s outlook for 2017, the firm’s investment outlook for stocks, bonds and asset allocations is muted but positive.

Vanguard’s outlook for global stocks and bonds remains the most guarded in 10 years, given “fairly high equity valuations and the low-interest-rate environment.”

According to the outlook, Vanguard does not expect global bond yields to increase materially from year-end 2016 levels.

Vanguard’s fair-value estimate for the benchmark 10-year U.S. Treasury yield still resides near 2.5%, even with two to three near-term increases in the policy rate.

“As we stated in 2015, even in a rising rate environment, duration tilts are not without risks, given global inflation dynamics and our expectations for monetary policy,” according to the outlook. “Recent low volatility and compressed corporate bond spreads point to credit risks outweighing those of duration.”

Regarding its stocks outlook, Vanguard’s medium-run outlook for global equities remains guarded in the 5%–8% range. However, its long-term outlook is not bearish and could be viewed as positive when adjusted for the low-rate environment.

Meanwhile, Vanguard’s outlook for portfolio returns is modest across all asset allocations when compared with the heady returns experienced since the depths of the global financial crisis.

This guarded, but not bearish, outlook is unlikely to change until Vanguard sees a combination of higher short-term rates and more favorable valuation metrics, according to the outlook.

“In some ways, the investment environment for the next five years may prove more challenging than the previous five, underscoring the need for discipline, reasonable expectations, and low-cost strategies,” the outlook states.

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