The investment fund behemoth known as Vanguard has come out with a forecast for the U.S. stock market, and it is not particularly cheerful. According to reporting from CNBC, Vanguard now states that the chances of a correction in the market stand at about seventy percent.
There are many metrics that go into coming up with a calculation like this. Primarily, the Vanguard group looks at things like the narrowing of the bond yield curve and the overvaluation of many equities in the market at the moment. When someone takes a quick look at the price to earnings ratio alone on many equities, it becomes readily apparent that there is greater risk to the downside than the upside.
Since 1960, the stock market has had a negative yearly return of ten percent or more about forty percent of the time. This is part of what it means to have a market in the first place. Some years the value of the market goes up, and some years it goes down. The wise investor knows this and does not let it upset him. He simply rides along with the waves of the market and attempts to make his money as best he can.
Vanguard publishes a forecast annually, and this year their five-year projections are the worst that they have put out for the market since after the Great Recession. They have told investors to expect no more than a four to six percent return on investments in the next five years. That is a remarkably low number considering that investors can routinely expect to make ten percent or more annually on average through the history of the market. Still, when an institution as large as Vanguard puts out the warning call to watch out for lower than expected investment returns, it is probably a good idea to heed their word.
The yield curve in the bond market between the two year note and the ten year note has a lot of people worried as well. The spread between the two has moved closer to what it looked like before the financial crisis than what the historical average is for that difference. In other words, the yield curve may also be pointing to troubling times ahead in the equity markets. It is just another sign to throw on top of the pile of mounting evidence that there may be a market correction in store for all of us sooner rather than later.