Our CIO Comments on Market Volatility

If the recent U.S. stock market gyrations have your head spinning, you’re not alone. With major indexes swinging up and down daily, it’s easy to understand why—whether you are overseeing a defined contribution (DC) plan, a defined benefit (DB) plan, or nonprofit investors—you might be feeling a bit seasick.

Three thoughts that might help:

• Maintain perspective. You’re not imagining things. The markets have been more volatile lately. But you may be surprised to learn that the increased volatility brings us closer to the historical norm. Investors may have anchored their expectations to the lower than normal volatility we experienced back in 2017.

Don’t let turbulence distract you: Keep your focus on the longer term

Notes: Intraday volatility is calculated as daily range of trading prices [(high-low)/opening price] for the S&P 500 Index. Sources: Vanguard calculations, using data from Bloomberg.

• Don’t do anything rash. If you’re an institution that’s been invested for years in a broad, diversified mix of stocks and bonds, your portfolio likely has appreciated. The same goes for retirement plan participants. What all investors should keep in mind is the risk of timing an investment decision poorly is generally higher than the risk of changing nothing at all in your portfolio. Remember, it’s also a decision to do nothing.
• Check your asset allocation. If market movements have meaningfully altered the ratio of stocks, bonds, and other asset classes in your investment plan, it may make sense to do some rebalancing.

If all this sounds rather familiar and you’re not especially concerned about the market’s fluctuations, I say: Thanks for reading. If you’re growing increasingly concerned about volatility, Vanguard can help institutions put it into perspective. We can leverage our deep expertise to provide you with guidance and ongoing support. Please don’t hesitate to reach out and consult with your Vanguard team.

Notes:

• All investing is subject to risk, including possible loss of principal.
• Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Gregory Davis, CFA, is Vanguard’s chief investment officer, responsible for the oversight of approximately $4 trillion managed by Vanguard Fixed Income, Equity Index, and Quantitative Equity Groups. The funds managed by these groups include active and index stock and bond funds, money market funds, and stable value funds. Previously, Mr. Davis was principal and global head of Vanguard Fixed Income Group, responsible for its portfolio management, strategy, credit research, trading, and planning functions. He has also served as the company’s Asia-Pacific chief investment officer and a director of Vanguard Investments Australia. Mr. Davis is a member of the Treasury Borrowing Advisory Committee of the U.S. Department of the Treasury.

Mr. Davis has more than 19 years of investment management experience. Before joining Vanguard in 1999, he worked at Merrill Lynch as an associate in global debt markets.

Mr. Davis earned a B.S. in insurance from The Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania. He is a CFA® charterholder and a member of the CFA Society of Philadelphia.

Make It Easy: Ask About E-Delivery of Enrollment Materials

Does sending an email sound a lot easier than maintaining and delivering hardcopy enrollment guides? If it does, sign up for enrollment guide e-delivery—and get current electronic enrollment guides to your employees with a click of the send button.

You’ll benefit from e-delivery if:

·        You want materials quickly. Ad hoc requests can be filled at any time (see below).

·        You’re spending too much time and money delivering hardcopy guides. E-delivery means no more shipping boxes to employee locations, or supporting hardcopy requests throughout the year.

·        You want to keep your options open. You can still request hardcopy guides.

·        You and your employees want less paper. Every click means less paper and instant access to the information necessary to join the plan.

How it works: If you’re receiving hardcopy guides automatically today, about 45 days prior to the next plan entry date, you’ll get an email instead of hardcopy guides. The email includes a link to the enrollment guide and a link to the employee website. If your plan has online enrollment, employees can enroll through the employee website. Just copy the email and send it to your newly eligible employees. Your employees eligible to enroll in the plan on the next plan entry date are listed in the Monthly Plan Confirmation report, found in the Reports section of your plan website.

Ad hoc requests: Contact Client Services any time you’d like electronic enrollment guides. They’ll send you the email, and the links will expire in 90 days so employees won’t receive outdated plan and investment information.

Electronic enrollment guides can reduce your administrative burden, make your days easier, and make your plan more convenient. Best of all, it’s a snap to get started. Contact Client Services to go digital today.

PayrollSync: Get a Timely Summary of Payroll Notifications

We know that tracking various payroll activities can be time consuming, and PayrollSync can help you be more efficient. PayrollSync consolidates payroll-related notifications that need action into an easy-to-use report. PayrollSync captures deferral changes, enrollment updates, new loans, and loan payoffs. This report makes it easy for you to address your notifications in a timely fashion when synced with your payroll frequency. Follow these simple instructions to set up your report.

Global Outlook Summary: Down But Not Out

As the global economy enters its tenth year of expansion following the global financial crisis, concerns are growing that a recession may be imminent. Although several factors will raise the risk of recession in 2019, a slowdown in growth—led by the United States and China—is the most likely outcome. In short, economic growth should shift down but not out.

We expect the global economy to continue to grow, albeit at a slightly slower pace, over the next two years, leading at times to so-called growth scares. In 2019, U.S. economic growth should drop back toward a more sustainable 2% as the benefits of expansionary fiscal and monetary policy abate. Europe is at an earlier stage of the business cycle, though we expect growth there to remain modest.

In emerging markets, China's growth will remain near 6%, with increasing policy stimulus applied to help maintain that trajectory. Unresolved U.S.-China trade tensions remain the largest risk factor to our view, followed by stronger-than-expected tightening by the Federal Reserve should the U.S. unemployment rate drop closer to 3%.

Global inflation: Unlikely to shoot past 2%

Previous Vanguard outlooks have rightly anticipated that the secular forces of globalization and technological disruption would make achieving 2% inflation in the United States, Europe, Japan, and elsewhere more difficult. In 2018, we accurately projected a cyclical firming in core inflation across various economies. In 2019, we do not see a material risk of further strong rises in core inflation despite lower unemployment rates and higher wages. This is because higher wages are not likely to funnel through to higher consumer prices, as inflation expectations are likely to remain well-anchored.

In the U.S., we expect core inflation to remain near 2% and even weaken by the end of 2019; an escalation in either tariffs or oil prices would probably affect U.S. core inflation only temporarily. In Europe and Japan, price pressures are likely to increase gradually as labor market slack erodes, though core inflation is likely to stay well below 2%. Higher wages are likely, yes, but higher inflation is not.

Monetary policy: Convergence commences, with the Fed stopping near 3%

As inflation moves toward central banks' target, financial stability risks rise, and unemployment rates continue to approach or drop below estimates of full employment, global central banks will stay on their gradual normalization paths.

In the United States, we still expect the Fed to reach terminal rate for this cycle in the summer of 2019, bringing the policy rate range to 2.75%–3% before halting further increases in the face of nonaccelerating inflation and decelerating top-line growth. Other developed-market central banks, though, will only begin to lift interest rates from postcrisis lows. We expect the first rate increase from the European Central Bank in September 2019, followed by a very gradual hiking path thereafter. Japan is late to the party and we do not expect any rate increases in 2019, though some fine-tuning of its policy framework is likely to ease the financial-stability risk. Emerging-market countries don't control their own destiny and will be proactively forced to tighten along with the Fed, while China is able to buck the trend with the help of tightened capital control and further modest currency depreciation.

Investment outlook: No pain, no gain

With slowing growth, disparate rates of inflation, and continued policy normalization, periodic bouts of volatility in equity and fixed income markets are likely to persist and perhaps accelerate. Our near-term outlook for global equity markets remains guarded, but a bear market would not appear imminent given that we do not anticipate a global recession in 2019. Risk-adjusted returns over the next several years are anticipated to be modest at best, given the backdrop of modest growth and less accommodative policy.

But all hope is not lost. Longer-term, our ten-year outlook for investment returns is beginning to slightly improve when we factor in higher short-term interest rates across major developed markets. This is the first (modest) upgrade in our global market outlook in more than ten years.

Fixed income returns are most likely to be in the 2.5%–4.5% range, driven by rising policy rates and higher yields across the maturity curve as policy normalizes. This results in a global fixed income return outlook of 2.2%–4.2% compared with last year's outlook of 1.5%–3.5%—albeit still more muted than the historical precedent of 4.7%.

Returns in global equity markets are likely to be about 5%–7% for U.S.-dollar-based investors. This remains significantly lower than the experience of previous decades and of the postcrisis years, when global equities have risen 12.6% a year since the trough of the market downturn. We do, however, foresee improving return prospects building on slightly more attractive valuations (a key driver of the equity risk premiums) combined with higher expected risk-free rates.

As was the case last year, the risk of a correction for equities and other high-beta assets is projected to be considerably higher than for high-quality fixed income portfolios, whose expected returns over the next five years are positive only in nominal terms.

In our upcoming annual economic and market outlook, we'll further define our expectations for the global markets in 2019 and beyond.

Note:
All investing is subject to risk, including possible loss of principal.

Tax Legislation Requires Action

Earlier this year, we noted some important retirement plan changes brought about by the Tax Cut and Jobs Act of 2017 and by the Bipartisan Budget Act of 2018. The biggest impact of these is the upcoming change to ease the rules around hardship distributions, starting with the first day of your 2019 plan year. That’s January 1, 2019, for calendar year plans!

While this change may be good for participants, you must take action to be sure the plan is following the new rules on the first day of your 2019 plan year. Key operational changes that you may need to take include: 

·        Removing suspensions and allowing participants to start to defer again, as of the first day of your 2019 plan year

·        Updating your hardship approval process

·        Downloading new distribution and disclosure forms

Read our article to learn more about how the hardship rules have changed, what you must do operationally on the first day of your 2019 plan year, which forms have been updated, and to catch up on other changes from this legislation.