Long-term strategic outlook

A five-year returns forecast for major asset classes — updated twice a year to help you set strategic portfolio allocations.

Key Takeaways
  • Over the course of this year, downside risks to growth have increased. Weakness in global exports mainly affecting Chinese and European manufacturing sectors has begun to spread to the U.S. manufacturing sector, but we believe it’s premature to price in a high risk of the current expansion ending. Three-to-five-year growth expectations have come down since the beginning of the year and are now closer to trend growth (1.75%). Inflation is well below the Fed’s stated target of 2%. We expect inflation to remain at these lower levels for the near future.
  • Forecasted returns have declined since our last analysis. Even before trade policy risks intensified in May, financial markets were signaling caution, culminating in certain parts of the yield curve inverting. Implied returns are lower for equities and bonds because nominal growth expectations are lower, and valuations for both equities and bonds are stretched. 
  • Monetary and protectionist policies are still key risks. Against a backdrop of slowing global manufacturing data and subdued inflation, the U.S.-China trade conflict is a negative development. If growth deteriorates further and there isn’t an agreement on trade, then 2-3 rate cuts won’t be enough to stave off a deeper slowdown, and the Fed may have to take rates down lower. We expect lower rates for longer, and while we are not forecasting a recession in the near future, odds of a recession in the next two years have risen.

Forecasted five-year total average returns (%)*


Forecasted five-year total average returns (%)*
Source: Columbia Threadneedle Investments as of July 2019. Past performance does not guarantee future results.

Strategic outlook: Three possible scenarios. To calculate the five-year forecast, we consider three scenarios and calculate a weighted average based on the likelihood of each. In the current environment, a binary outcome seems more likely.

Most likely (50%): Fiscal fade

The boost to growth provided by 2018 fiscal policy changes is exhausted by year end. Trend growth resumes. However, with little room for error, the economy becomes susceptible to a recession if shocks occur.

Slightly less likely (45%): Trade disputes

and protectionism

Positive U.S. growth is derailed by tariffs on imports. Protectionism elicits a retaliatory response from China and other key global trade partners. The Fed pauses, but damage from a stronger dollar and current rate levels begins to impact the weakening economy. Initially, there’s an inflationary environment (due to tariffs) but ultimately a deflationary shock to the economy.

Least likely (5%): Business-friendly

Supply-side benefits resulting from the corporate tax cuts could improve productivity and result in higher growth than trend for a sustained period of time. The Fed is able to raise rates significantly without a recession as “neutral” rate moves up.