5 Market Predictions for 2018: Vanguard’s Bogle

“Past performance is no guarantee of future results,” is a phrase you can find in the investment disclosures of any mutual fund prospectus. If John Bogle, creator of the very first index mutual fund, is correct about where the latest bull market is heading, then you might want to start believing it.

That stocks will only return an average annual 4% over the next decade compared to the 10% average yearly return of recent decades is just one of five predictions that Bogle made in a recent interview with CNBC. Below, we take a closer look at that prediction and whatever else the legendary founder of Vanguard group expects for 2018 and beyond. (For more, see also: Why the Bull Market May Last Until 2018.)

With expectations of a future 2% dividend yield, which is lower than the historical average of 4.4%, and a 4% growth in earnings, Bogle forecasts that future investment returns on stocks will be 6%. Factoring in a drop in the historically high price to earnings ratio (P/E Ratio) of 24 to about 20 or possibly less would shed 2% off of that 6% return. That leaves an annual rate of return of 4% for the U.S. stock market, which is less than half of what the return has been over past decades, and that’s not including investment fees.

Despite this fizzling out of the U.S. stock market, Bogle argues that the innovative and entrepreneurial strength of the U.S. will make it a safer bet than the rest of the global market. He affirms his point by claiming that, over the long-term, investing domestically has brought investors higher returns.

The data looks to be on his side, according to CNBC’s interpretation of Morningstar data analysis. While year to date both the MSCI EM and the MSCI EAFE, at returns of 33.17% and 21.38% respectively, are outperforming the S&P 500’s return of 17.45%, the 10-year annual average favors the latter. For the S&P 500, that average return over the past decade has been 8.04%, compared to only 1.73% and 2.01% for the other two non-domestic markets.

Over the next 10 years, a bond portfolio should yield an annual average return of 3.1%. Bogle’s estimate is based on the construction of a bond portfolio with 50% invested in U.S. 10-year treasuries and the other 50% in long-term investment-grade corporate bonds. Currently, 10-year treasury notes are yielding 2.2% and the corporate bonds are yielding 3.9%, according to CNBC.

In a low return environment Wall Street firms will start to feel the pinch as they struggle to compete with the growing popularity of passively managed index funds like ETFs, of which Bogle’s Vanguard is the second largest provider next to BlackRock. (To read more, see: Why Your Passive Fund Is Crushing Active Managers.)

Bogle argues that sustainable and responsible investing, or what is known as impact investing, will not be as effective as many of its advocates hope. In another nod to passive investing, Bogle reasons that impact investing is just another form of active management, and will therefore likely underperform the broader market.