A five-year returns forecast for major asset classes — updated twice a year to help you set strategic portfolio allocations.
- A slowing economy at or near trend levels is vulnerable to shocks. The fiscal stimulus provided by the 2017 tax cuts is fading completely, and GDP growth is slowing to trend levels. Because of this, we think that the economy in 2020 will be more susceptible to setbacks due to a lowered ability to absorb shocks or surprises. The most common concerns are the ongoing trade war and negative credit surprises that could damage confidence and cause businesses and consumers to retrench.
- Forecasted returns have declined since our last analysis. Even before trade policy risks intensified, 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.
- Protectionist policies are still key risks. Trade conflict and protectionism are likely to be permanent fixtures of our
economy. Although tensions may abate ahead of the elections, there is no way of knowing when they might reemerge. We might see growth disruptions and higher prices for goods.
Forecasted five-year total average returns (%)*
Strategic outlook: To calculate the five-year forecast, we usually consider three scenarios and calculate a weighted average based on the likelihood of each. But recently, Federal Reserve Board Chairman Jerome Powell acknowledged that the “neutral” rate (the short-term rate of interest that neither spurs growth nor slows it down) might be lower than the Fed’s estimates. This is contrary to the optimism we saw in the financial markets post tax cuts, when many assumed that 2017 tax rate changes would result in more permanent productivity enhancements. Accordingly, we removed the third scenario of faster growth from our assessment.
Most likely (70%): Growth slows to trend levels
Our base case assumes that U.S. growth slows to trend levels. According to the Congressional Budget Office and our own analysis, it would be in the range of 1.8%–2.0% — the supply-side estimate of growth based on demographics and productivity.
Less likely (30%): Trade disputes and protectionism
In this scenario, we might see our slow-growth economy succumbing to disruptions and enter a recession. Theory suggests that inflation initially rises, but tariffs and subsequent recessions are eventually deflationary.