The impact of the recession on the market may already be priced in, says Vanguard’s CIO

The jittery stock market of the year is focused on a long-awaited recession — a frightening event that a hike-happy Federal Reserve is doing nothing to prevent. But amidst such a widespread negative outlook, Gregory Davis, CIO of Vanguard Group, is brighter about the future.

“Our base case for the US includes a relatively mild recession over the next 24 months,” Davis said in an interview on the wealth manager’s website. Vanguard is best known for its large retail presence, though it does have a significant institutional client base.

The S&P 500 is firmly in bear market territory and is down 22% this year. The bond market has also suffered poor results, with the Bloomberg US Agg down 15% in 2022.

Regardless, Davis said, investors could be through the worst. “Because financial markets tend to be forward-looking, a recession may already be priced in,” he argued. In addition, “it is premature to announce the death of the traditionally balanced portfolio.”

Davis believes both stock and bond investors should be on the lookout for upside. “Yes, the correlation between stocks and bonds has increased this year, which has wiped out some of the diversification benefits. But that has happened occasionally in the past.”

According to Davis, there is a silver lining in this situation. “With the recent sell-off, stock markets are now close to fair value,” he said. “In the bond markets, rising interest rates are causing investors pain in the short term, and higher interest rates have increased expectations of returns.”

Davis said he doesn’t think Europe is in recession yet, but will be until the end of the year. He expects that to be mild too. He doubts China is in recession, although he acknowledges that its economic slowdown is having an impact on the rest of the world. Still, Davis continued to predict that Beijing would ease its tough COVID-19 policies and enact stimulus packages.

Despite his relatively optimistic views, Davis indicated that he believes investment returns will be subdued in the coming years, even after the expected recession. “Even before the likelihood of a recession increased, we forecast historically low returns for stocks and bonds for the years to come,” he said.

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Tags: Bloomberg US Agg, Bonds, China, Europe, Gregory Davis, Recession, S&P 500, Stock Market, Vanguard Group