Monthly Market perspectives

Vanguard’s latest economic and market update. A concise assessment you can read in just a few minutes including our latest asset class return projections.

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of October 16, 2024.

Key highlights

• After a strong 50-basis-point start to the Fed's easing cycle, we expect a 25-basis-point reduction in both November and December.
• Euro area growth momentum is slowing sharply, with Germany on the cusp of recession.
• We believe this year's increase in the unemployment rate has been driven by growth in the labor force, not by job losses.

Vanguard’s outlook for financial markets

Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the June 30, 2024, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.

Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.

Source: Vanguard Investment Strategy Group.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of June 30, 2024. Results from the model may vary with each use and over time. For more information, see the Notes section at the end of this article.

Region-by-region outlook

United States

In its hiking cycle that began in March 2022, the Federal Reserve raised rates steadily—and, at times, aggressively—through July 2023 to fight inflation propelled to generational highs by supply-and-demand imbalances related to the COVID-19 pandemic. These imbalances were especially noteworthy in the labor market. A worker shortage kept wage pressures high and the unemployment rate well below NAIRU.

In the lead-up to its first rate cut in September, the Fed expressed confidence that the pace of inflation was moving toward target but indicated some concern about the labor market’s health. The Fed’s dual mandate is to ensure price stability and foster maximum sustainable employment.

“Our NAIRU estimate suggests that the labor market has reached a healthy balance,” said Adam Schickling, a Vanguard senior economist. “While the Fed may favor additional rate cuts to bring the policy rate closer to their estimate of the neutral rate, we don’t expect near-term labor market conditions to prompt an accelerated cutting cycle.”¹

Recent activity supports our view that economic growth is moderating but remains healthy. The Fed appears to have declared victory in its inflation fight, based on its most recent projections for the core Personal Consumption Expenditures (PCE) index. It sees balanced risks to its dual mandate of ensuring price stability and maximum sustainable employment.

The upturn in U.S. unemployment before the start of the Federal Reserve’s rate-cutting cycle likely reflects a normalized labor market, not one poised for rapid deterioration. The unemployment rate has risen from 3.4% in early 2023 to the low 4.0% range. It’s now in line with our estimate of the non-accelerating inflation rate of unemployment. NAIRU, as it's known, is the lowest rate of unemployment that wouldn’t be expected to promote inflation.

Key gauge suggests balance in the U.S. labor market

Sources: Vanguard calculations, based on data from the St. Louis Federal Reserve FRED database through August 31, 2024.

Note: NAIRU is the non-accelerating inflation rate of unemployment

We expect:

• Reductions of 0.25 percentage point in the Fed’s target for short-term interest rates in both November and December 2024. That would leave its policy rate at 4.25%–4.50% at year-end.
• Full-year 2024 economic growth above 2.00%.
• The year-over-year pace of inflation (core PCE) to rise to 2.80% by year-end because of challenging comparisons with year-earlier data.
• The unemployment rate to end 2024 marginally above its September rate of 4.10%.

Euro area

With Germany on the cusp of recession and euro area growth momentum slowing sharply, the European Central Bank trimmed its benchmark interest rate by 0.25 percentage point on October 17. It was the third such reduction of a cutting cycle that began in June.

We expect:

• Slower third-quarter economic growth as a two-year manufacturing slump continues, and full-year 2024 growth of 0.60%, down from 0.80% in our previous forecast.
• Another ECB policy rate cut in December, which would leave its deposit facility rate at 3.00% at year-end.
• The year-over-year pace of core inflation, which excludes food, energy, alcohol, and tobacco prices, to fall to about 2.50% by year-end 2024. It was 2.70% in September. Still-elevated services inflation (3.90% last month), the last significant barrier to lower core inflation, underscores our long-held view that the last mile to lowering inflation to central bank target levels is the most difficult.

United Kingdom

The nation’s budget is set for release October 30. We’re watching for measures that could boost long-term economic growth—and productivity—primarily through greater public and private investment. The U.K. has trailed the rest of the G7 in investment levels for most of the last three decades. 

We expect:

• The Bank of England (BOE) to cut its policy interest rate by 0.25 percentage point in both November and December, leaving a year-end bank rate of 4.50%. Further cuts next year likely will drop the rate to 3.50% by year-end 2025.
• Full-year 2024 economic growth of 1.00%, down from 1.20% in our previous forecast.
• The year-over-year rate of core inflation to end 2024 around 2.80% and to hit the BOE’s 2.00% target by the second half of 2025.

China

The Ministry of Finance pledged in an October 12 briefing that forthcoming fiscal stimulus would address property market and local government debt challenges. Its failure to specify a headline dollar figure left some observers disappointed.

We expect:

• That meaningful stimulus is forthcoming, in an amount that could exceed China’s government debt limit and would require National People’s Congress (NPC) approval. We expect such specificity to be provided after the NPC’s late-October meeting.
• China will still be able to reach its 5.00% economic growth target for 2024—provided a sufficiently timely fiscal policy response. Gross domestic product grew just 0.70% in the second quarter compared with the first and 4.70% year over year.
• Headline inflation of 0.80% and core inflation of 1.00% for 2024.

Emerging markets

Policy interest rates and the pace of inflation are moving in opposite directions in Latin America’s two largest economies.

Rising inflation driven by drought led the central bank of Brazil to raise its policy Selic rate to 10.75% last month. Broad prices rose by 4.42% year over year in September, near the upper end of a 1.50-percentage-point tolerance band around the bank’s 3.00% inflation target. Another rate hike may occur if inflation persists.

In Mexico, the pace of core inflation fell for a 20th straight month, to 3.91% year over year in September. Banxico, the central bank, cut interest rates last month for the third time this year, to 10.50%. With core inflation falling into Banxico’s target range, we believe additional rate cuts are possible in 2024. Peso depreciation will remain a concern.

1 The neutral rate is a theoretical interest rate that would neither stimulate nor restrict an economy at full employment.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

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