Vanguard Forecasts The Next 10 Years: 65% Chance Of Recession, Bet On Value Stocks

Zinger Key Points
  • The firm downgraded its previous forecast for U.S. economic growth in 2022.
  • Equity prices begin to fall prior to the start of a recession, the report states.

The Vanguard Group is projecting an annualized return of between 4.1% and 6.1% for U.S. stocks over the next ten years, with value stocks beating those returns.

The Valley Forge, Pennsylvania-based investment giant has issued a white paper looking at the year ahead. For Vanguard, which touts $7 trillion in assets, the probability of the U.S. entering a recession within the next 12 months is 25%. However, that likelihood climbs to 65% in the next 24 months.

The firm is also expecting the Federal Reserve to continue raising its federal funds rate over the next year, to reach between 3.25% and 3.75%.

Value To Beat Growth In The Next Ten Years

Value stocks, known as those currently trading below their intrinsic value, are expected by Vanguard to provide better returns than the overall market, with projections of between 4.4% and 6.4% annually over the next ten years.

Growth stocks, however, could be a bad choice for  the decade ahead. The group is giving shares of companies expected to grow above market levels, an annual return projection of between 1.6% and 3.6%.


Is A Recession On The Horizon?

Perhaps. The probability of a recession is 25% for the next year and 65% over the next two years, Vanguard says.

“When a recession occurs, we don’t know how long it will last or precisely when equity markets will recover, making it virtually impossible to time the markets," the report says. "But equity prices have frequently begun to fall prior to the start of a recession and hit their low point sometime during the recession."

The firm has downgraded its previous forecast for U.S. economic growth in 2022 after a second consecutive quarter of economic contraction.

Vanguard is expecting full-year growth in 2022 to reach between 0.25% to 0.75%, down from last month’s estimate of about 1.50%.

It's unlikely that the National Bureau of Economic Research will declare a recession any time soon, despite two-quarters of consecutive economic contraction, Vanguard says.

Fed Funds Rate And Inflation

In order to control inflation, the Fed might see fit to continue its spike of the federal funds rate in September. The rate was hiked at a new range of between 2.25% and 2.5% in July.

By the end of the year, Vanguard is expecting the federal funds rate to reach between 3.25% to 3.75%. If the rate were to reach 4% by 2023, the firm is expecting that would help contain inflation successfully.

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