Why Vanguard’s chief economist says there is an elevated risk of a ‘large drawdown’ in stocks – MarketWatch


The narrative in markets these days is pretty simple.

The global economy has faltered, but has plateaued and will get better next year, on a combination of an expected reduction in trade tariffs and the lagged impact of interest-rate cuts. As a result, stocks keep grinding higher and notching records—on Monday, the S&P 500 SPX, -0.06%  registered its 23rd such peak of 2019.

Joe Davis, the global chief economist and head of investment strategy at fund giant Vanguard, isn’t buying it. “In the year ahead, we don’t foresee a significant reversal of the [U.S.-China] trade tensions that have occurred so far. And with continued geopolitical uncertainty and unpredictable policy-making becoming the new normal, we expect that these influences will weigh negatively on demand in 2020 and on supply in the long run,” he tells clients. Davis says U.S. growth will decelerate to about 1% next year, and China also will grow below trend.

No surprise, then, that Davis isn’t terribly optimistic about financial markets, citing heightened policy uncertainties, late-cycle risks and stretched valuations. “Our near-term outlook for global equity markets remains guarded, and the chance of a large drawdown for equities and other high-beta [more volatile] assets remains elevated and significantly higher than it would be in a normal market environment,” Davis says in the call of the day.

High-quality fixed-income assets “remain a key diversifier.”

Returns over the next decade should be “modest,” with U.S. stocks expected to return 3.5% to 5.5% per year over the next decade. Global equities should do better—6.5% to 8.5% per year, for U.S.-based investors—because of both more reasonable valuations and the expected depreciation of the dollar DXY, +0.15%.

See also  MarketWatch: Stock Market News - Financial News - MarketWatch

The chart


Mark Zandi, the chief economist at Moody’s Analytics, has been warning over the risk of a global recession for some time. In a presentation, he showed a slide illustrating both the possible triggers of a recession and the economic impact those triggers would engender. Safe to say that a trade-war escalation and a no-deal Brexit worries Zandi.

Random reads

South Dakota has commissioned a public service campaign with the somewhat puzzling tagline “Meth. We’re on it.”

Twitter on Monday night debated an important topic: Did a Congressman pass wind on live TV? (He says no.)

Not a Nativity scene—a camel, cow and donkey were spotted roaming together, in Kansas.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. Be sure to check the Need to Know item. The emailed version will be sent out at about 7:30 a.m. Eastern.

Follow MarketWatch on Twitter, Instagram, Facebook.