Vanguard predicts next 10 years: 65% chance of recession, bet on value stocks

The Vanguard Group projects an annualized return of between 4.1% and 6.1% for US equities over the next ten years, with value stocks outperforming these returns.

The Valley Forge, Pennsylvania-based investment giant has released a white paper on the year ahead. For Vanguard, which claims $7 trillion in assets, the chance of the US entering a recession within the next 12 months is 25%. However, this probability increases to 65% over the next 24 months.

The company also expects the Federal Reserve to continue to raise its federal funds rate over the next year, to between 3.25% and 3.75 %.

Value to beat growth over the next ten years

Value stocks, known as those currently trading below their intrinsic value, are expected to outperform the broad market, according to Vanguard, with projections of between 4.4% and 6.4% per year over the next ten years. years.

Growth stocks, however, could be a bad choice for the decade ahead. The group gives stocks 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?

Maybe. According to Vanguard, the probability of a recession is 25% next year and 65% over the next two years.

"When a recession hits, we don't know how long it will last or exactly when stock markets will recover, making it virtually impossible to time the markets," the report said. "But stock prices often started falling before a recession began and bottomed out at some point during the recession."

The company lowered its previous forecast for U.S. economic growth in 2022 after a second straight quarter of economic contraction.

Vanguard expects full-year 2022 growth to be between 0.25% and 0.75%, down from the month's estimate last about 1.50%.

The National Bureau of Economic Research is unlikely to declare a recession anytime soon, despite two quarters of consecutive economic contraction, according to Vanguard.

Federal Funds Rate and Inflation

In order to control inflation, the Fed may see fit to continue its hike in the fed funds rate in September. The rate was raised to a new range between 2.25% and 2.5% in July.

By the end of the year, Vanguard expects the fed funds rate to reach between 3.25% and 3.75%. Should the rate reach 4% by 2023, the company expects this will help contain inflation successfully.

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