A five-year returns forecast for major asset classes — updated twice a year to help you set strategic portfolio allocations.
We are not recovering from a typical recession. The intentional shutdown of the economy and the massive, global synchronous fiscal and monetary support have created distortions across the economy — from shifts in consumption patterns to the labor force. This has put policymakers and central bankers in uncharted waters; it’s unusual to have higher-than expected inflation alongside a labor market that’s still recovering.
Inflation data will get worse before it gets better. Inflation is proving to be both more persistent and higher than the Fed (and the markets) initially anticipated. Rising costs are impacting a wider set of goods and services, and the supply distortions driving this are not likely to end quickly. While the Fed wants to see some level of inflation, timing the use of its tools to control higher prices requires a new surgical precision. If various forces keeping inflation high ease in 2022, then the Fed can implement rate hikes in a measured fashion. This is the Goldilocks scenario.
In 2021, we knew the Fed would stay accommodative, but we don’t have that certainty in 2022. For the markets, the flood of supportive programs introduced during the pandemic had the beneficial effect of lifting nearly all assets. As that support is withdrawn, there will be clear winners and losers. Current estimates forecast similar or higher returns across most asset classes, with the exception of U.S. small caps, developed markets and U.S. Treasuries. Return forecasts increased the most for U.S. high yield and emerging market debt.
Forecasted five-year total average returns (%)*
Strategic outlook: To calculate the five-year forecast, we considered two economic scenarios and calculated a weighted average based on the likelihood of each.
Most likely (70%): Goldilocks Inflation eases in 2022 and gets closer to the Fed’s acceptable range, but growth is generally well above trend, supported by a strong labor market. Inflation is also above what we’re used to over the last decade. There’s effective handling of monetary policy with modest market turbulence.
Slightly less likely (30%): COVID continues Vaccination efforts are unable to prevent an uptick in serious disease, and we see renewed restrictions on activity. In this case, after some growth in 2021, we could see weakness developing over the medium term. But we believe there’s a low probability for this scenario.