Vanguard Sees Market Correction Odds at 70%

2018 could be a rude awakening for investors who haven’t set stop limits for their equities, as research conducted by Vanguard Group ($5 trillion) sees a 70% chance of a US stock market correction, a 30% increase over what has been the norm for the past 60 years.

Last week, Vanguard published its annual economic and investing outlook, advising investors to expect between 4% and 6% returns from stocks in the next five years.

“Having a 10% negative return in the US market in a calendar year [within a five-year forward period] has happened 40% of the time since 1960. That goes with the territory of being a stock investor,” Joe Davis, the firm’s chief economist, told CNBC. “It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue.”

According to Davis, the continued compression of risk premium is one of the indicators for the imminent correction, which Vanguard expects to experience a 60% drop when international equities are included in a stock portfolio.

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“It doesn’t drive risk down to zero, but valuations are not neatly as stretched in other parts of the world,” Davis said. “The real power is other developed markets.”

Another indicator for the correction is the growing concern for a flattening in the yield curve. While the two-year and 10-year note yields are at the lowest levels since before the financial crisis, the spread between junk bond yields and Treasurys are closer to the level before the crash than the long-term historical average, as reported by CNBC.

Strategists at Morgan Stanley ($1.3 trillion) forecast the end of the current bull market to happen within the first half of 2018 due to new flows from retail investors, following the signing of the tax bill.

“We expect volatility to finally pick up in a more sustained manner as growth decelerates and financial conditions tighten,” the strategists wrote. “We would be very surprised if we don’t return to a more normal environment and witness at least one if not several 10%-plus drawdowns next year.”

Although the strategists are not expecting a 2018 recession, they are predicting the stock market could start discounting a possible recession in 2019.

“On that note, credit markets may be topping now, which tends to be a good 6-12 month leading indicator for stocks,” they wrote.

Tags: Morgan Stanley, Stock Market Correction, US Stocks, Vanguard

Contrary to multiple reports painting a bleak retirement picture for millennials, British think tank Resolution Foundation has released a report that says those entering the workforce today will have a similar retirement to current retirees.

The report found that at retirement age, individual pension incomes for millennial men, who were born in the 1980s and retiring in the 2050s, will on average be at similar levels to incomes for younger baby boomer men born between 1955 and 1965, who will begin retiring in the 2020s, when expressed in constant earnings terms.

“Overall, future pensioners look set to experience similar levels of earnings replacement adequacy to recent retirees,” said the report. “Across earnings distributions, projected replacement rates for the younger baby boomers through to the millennials are certainly not the disaster that public perceptions would suggest.”

Earlier this year, the International Monetary Fund (IMF) urged millennials to prepare for “pension shock.” The IMF said young workers in advanced economies won’t be able to rely on pension funds like their parents or grandparents have, and will have to work longer and save more than previous generations. The IMF said the so-called millennial generation needs to take action now to make sure they will have enough money to make it through a retirement that could last as long as 30 years.

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And a report released this summer from market research company YouGov said that only about half as many millennials in the UK have a pension as do Generation Xers (born between 1966 and 1980) and baby boomers. It also said that 44% of 18- to 34-year-olds say they have no pension provision, compared to 22% of 35- to 54-year-olds, and 20% of those older than 55.

While the Resolution Foundation report paints a more optimistic picture for millennials than other reports, it doesn’t gloss over the challenges facing future retirees. It said that earnings replacement rates—the measure that the Pensions Commission established to benchmark retirement income adequacy—have fallen short of the target for all but the lowest earners.

According to the report, approximately 77% of adults retiring during this century have had replacement rates below the adequacy benchmark for their level of earnings. It said projected replacement rates for the younger baby boomers through to the millennials remain “far from the adequacy benchmarks that the Pensions Commission set in its sights.”

The report also found that constant-earnings terms pension incomes dip by around £25 ($33.40) a week for men in the younger half of Generation Xers who will be retiring in the mid-2040s. It also said that following a modest improvement in individual pension incomes for baby boomers retiring in the 2020s, incomes among women are projected to remain flat for Generation X and millennials.

“Consistent with our findings for current pensioners,” said the report, “we expect around one-fifth of new retirees to continue to enter retirement with an income below the level of the individual pensioner minimum income standard.”

The minimum income standard defines how much income people need to reach a minimum socially acceptable standard of living in the UK.

“Over the full duration of retirement, we expect a greater share of pensioners to fall below the individual pensioner minimum income standard,” said the report. “That’s because pension income—a mix of state and private pensions—increases by less than earnings each year.”

Tags: International Monetary Fund (IMF), Millennials, Pension, Report