Vanguard, the second largest asset manager in the U.S., expects higher risks and lower returns in financial markets next year.
“We anticipate a bit more volatility and an uptick in inflation in the year ahead, accompanied by more muted equity returns,” said Joseph Davis, Vanguard’s chief economist and investment strategy group head, in a statement accompanying the firm’s 2018 market outlook.
In what it termed it “most subdued” market outlook in a decade, Vanguard forecast a 3% to 5% return in U.S. equities — down sharply from the 10% annualized rate over the past 30 years — and a 5.5% to 7.5% gain in foreign equities. Fixed income assets are expected to return 2% to 3%.
Moreover, Vanguard sees more downside risks in equities than in the bonds despite the expectations for higher inflation and greater odds of a market correction in the U.S. rather than overseas.
U.S. equities are approaching historical highs in valuation but not grossly overvalued, while non-U.S. developed markets are fairly valued and emerging markets are slightly overvalued, according to Vanguard.