Vanguard Predicts Low Stock Market Returns Over Next 10 Years

The economists at investing giant Vanguard predict that, over the next 10 years, annual U.S. stock market returns will likely average between 3 and 5 percent. When you factor in inflation — which, luckily, Vanguard predicts will be below 2 percent — the real rate of return is expected to be under 3 percent.

That’s “a far cry from the returns investors may have become accustomed to over the last several years,” says Vanguard’s senior economist Andrew Patterson. The S&P 500, a benchmark of 500 public company stocks, had a rate of return of almost 22 percent last year.

You can blame part of the slowdown on strategies employed by the Federal Reserve following the 2008 financial crisis. The Fed pumped billions into the market, buying up bonds and mortgage-backed securities, which in turn, allowed investors to use that money to bid up stock prices. But over the past few years, the Fed has curtailed its spending and started to increase interest rates. Now, with the Fed continuing to draw back, Vanguard expects stock market growth to slow.

“We do expect, for the foreseeable future, far more modest returns than we’ve seen in the past few years.” -Jonathan Lemco, Vanguard senior investment strategist

“That period is now over and, in a way, we’re now moving into a period of where we have to give that back,” says Vanguard economist Peter Westaway. “The depressed returns going forward is very much a consequence of unwinding of those stimulative policies.”

Also, investors have lately enjoyed “remarkable” returns, compared to historic rates, Jonathan Lemco, Vanguard’s senior investment strategist, tells CNBC Make It. “It would be unreasonable to expect these phenomenal rates going forward over a sustained period of time,” he says.

“We do expect, for the foreseeable future, far more modest returns than we’ve seen in the past few years — not terrible, probably not negative, but much more modest, positive returns,” Lemco says.

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