Key highlights from the report include:
• The U.S. economic recovery is likely to continue to grow at a below-average 2%−3% pace, given the continuing concerns about housing, consumer debt and fiscal austerity in Europe and the U.S. Future U.S. economic growth should prove uneven, marked by periodic bouts of market volatility and economic slowdowns in 2012 and beyond.
• An “inflation paradox” is likely to remain in place for much of the developed world, as the attempts of certain central banks to mitigate the deflationary forces of debt-reduction and fiscal austerity lead others to worry that markedly higher-than-expected inflation is almost certain in the future. Very likely, U.S. inflation should tend to be better behaved, averaging in the 2-3% range over the next several years. The report also discusses why the risk of a repeat of the high-inflationary period of the 1970s and early 1980s is estimated to be less than 10%.
• Given the outlook for Federal Reserve policy, real (inflation-adjusted) interest rates are likely to remain negative for years. This outlook is unfortunate for savers, who, collectively, remain the “sacrificial lambs” of monetary policy.
• The return outlook for broad bond portfolios is muted. The expected long-run median return of the broad taxable U.S. fixed income market most closely resembles the historical bond returns of the 1950s and 1960s. The diversification benefits of bonds are expected to persist despite the tendency for slightly higher interest rates over the next decade.
• The long-run outlook for the global stock market is likely to be attractive despite a backdrop of elevated market volatility, below-average growth expectations, and near-0% short-term interest rates. As a result, balanced-portfolio returns over the next decade have a higher chance of matching their long-run averages than some may think, especially when those returns are adjusted for our outlook of future inflation. In short, the distribution of real returns on a balanced portfolio looks more normal than abnormal.
• Contrary to some suggestions that the next decade warrants a radically new investment strategy, Vanguard maintains its long-held view that the principles of portfolio construction remain unchanged, given the expected risk-return trade-off among stocks and bonds.
To view the report in its entirety, visit https://institutional.vanguard.com/2012outlook.