How does Vanguard develop the Vanguard economic and market outlook (VEMO) and measure its accuracy?

Every year at this time Vanguard Chief Global Economist Joe Davis and his team produce the annual Vanguard Economic and Market Outlook, a comprehensive, forward-looking forecast based on their own research and the best available resources in the field.  Joe describes his approach to forecasting, how his team seeks to convey distribution of risk along with the most likely outcomes, and why they focus on longer term forecasts for the financial markets. 

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Rebecca Katz: We did have a question, and someone submitted this in advance as well: “How accurate were your forecasts for 2018?” So when we look at making forecasts, traditionally, your group makes long-term forecasts with a degree, a band, of possible results. So how do you measure whether or not your forecasts are accurate?

Joe Davis: So we have a good discipline of forecasting. I’m proud of our framework, so we do not—we certainly don’t provide a 1-year-ahead stock market forecast, like a number with a decimal point. I mean, I think that shows no humility at all.

Our job is to portray the distribution of risk and to be very clear what we think the most likely outcome is. But we’re also trying to convey the risk, and for the financial markets, we will at least look out 5 years and beyond.

Now, we have 1-year-ahead forecasts. We just have a wide band around them. There’s just not that much predictability to them. But we spend a lot of time looking for the best-in-class, the state of the art in terms of economic forecasting, academic studies. We had a whole team looking at this.

I can tell you based upon all that and our framework—in part because our return forecast, we look out a little bit beyond just the next day and the next quarter—that, I think, we’ve calibrated our forecast horizon to where I think we have something to say, and that’s generally been a positive for those that have read the outlook.

So do we have a perfect track record? No, far from it. We’ve generally been, though—I think we’ve got pretty good marks in terms of our forecasts for the financial markets over the past 5 or 10 years, because this time 10 years ago we were one of the very few firms saying our economic outlook is pretty somber. It’s going to be a very slow recovery, and there’s a lot of pain in the labor market globally. But our economic forecast was like this, but our investment forecast, if anything, was for above average. And some investors respectfully pushed back on that, but it was the valuations there were discounting even worse economic environment.

I say that for context. Every year since then, in the past 2 years, we’ve had a more guarded outlook. Now we were too conservative last year, but we’re looking at longer term. Now I think we’re seeing some of that underperformance play out. So I’d say our forecasts, our track record for the financial markets, stocks and bonds, have been pretty good. Our forecast track record for inflation has been pretty good. We have said that inflation was going to be hard-pressed to go beyond this 2% range.

Now what have we done less well? I think we’ve had, at best, an average forecast assessment in near-term, economic-like growth. I think we’ve said, “Listen, China’s not going to have a hard landing. The U.S., the past several years, we’ve had growth scares. Well we’re not going to have a recession.” But did we get the GDP forecast exactly right? No. I mean sometimes we go in the year saying, “It’s going to be closer to 3%.” It was at best 2%. So we’ve had to downgrade some of our growth forecasts for Europe and the U.S. and at times for China. But I think we’ve gotten the big-picture things right, but we have not got what we call the wiggles in the data. And we won’t get them going forward, but I think we’ve framed the argument and the context right, and we’ve gotten the big picture, generally speaking, pretty good.


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