Vanguard’s ‘40%’ recession warning fits fund marketing
Vanguard's approach: "Make a prediction, then say you don't make predictions… You can look smart if it does happen, but if it doesn't then you can also say that you maintained that 'the odds were still against it occurring.'"
Vanguard Group, the Malvern investment giant, says the chances of a recession are between 30 percent and 40 percent by 2020.
"Sober" Vanguard officers made those squishy, weather-report-like predictions last week in a column by the New York Times' Jeff Sommer. And then they predictably hedged: "We don't make any actual predictions. … The market might rise."
I read that and smiled. Not because I love recessions. But because the smart people at Vanguard have warned us, gently, vaguely, in a qualified manner, about something like 15 of the last five recessions and market slowdowns. It's what they do.
"The U.S. is on a very, very slow growth path," then-Vanguard chief investment officer Gus U. Sauter warned Bloomberg TV back in 2012. The annual GDP growth rate has since averaged about 4 percent, and the S&P 500 rose 9 percent or more in five of the next six years.
In early 2016, I quoted Vanguard's then-boss, Bill McNabb, warning that "Vanguard expects growth will be so slow that stock-market returns for the next 10 years will be a historically low 3.5 percent to 5 percent, after inflation." The S&P 500 then proceeded to rise 9.5 percent for that year, and twice as fast the next.
That warning could still be right; the decade is not over; the market could stall today, and stay flat til the Philadelphia Sesquicentennial in 2026. And if you expect that, you might consider electronically hauling your money out of Malvern and down U.S. 30 to DNB First Bank in Downingtown, which was paying a nation-leading 3 percent interest on 5-year deposits, last I checked.
The "40 percent" mark sounds way familiar: It fits right in to what a Wall Street Journal column last spring called "the 40 percent rule, a favorite forecasting tactic of Wall Street analysts and other prognosticators trying to make a bold call without being too bold."
Dan Wiener, publisher of the Independent Advisor for Vanguard Investments newsletter, summarized Vanguard's approach: "Make a prediction, then say you don't make predictions." That way, "you can look smart if it does happen, but if it doesn't, then you can also say that you maintained that 'the odds were still against it occurring.'"
By a ratio of 3 to 2, in this case.
A recession by 2020 is "a useless prediction," based as it is on where bond rates have looked as if they are heading, Wiener concluded. "A recession is inevitable" someday. Even the proverbial stopped clock is right twice a day.
But Vanguard founder Jack Bogle has always warned us against market-timing with your retirement money.
Why does Vanguard warn us so steadily? It's the securities market, and someone has to do the marketing. An enthusiastic market — the optimism of the late Obama years that accelerated at Trump's election — tends to favor aggressive bets, the kind that lead people to buy venture and buyout and hedge funds and other high-fee investments.
Vanguard's message is different; and its products are different. Warnings of uncertainty, market risk and possible decay exude a quiet subtext: Buy our index funds (and our advice); even if the market heads south, we revert to the mean, so you won't lose more than other people will; and with our low fees, you'll lose less.
Which isn't a bad program, after all. But is it news?