Webcast replay: Slow growth for 2016?
December 30, 2015
Replay and transcript from a recent Vanguard webcast
In this recent webcast, Vanguard Global Chief Economist Joe Davis discusses what's ahead for the global economy and the financial markets in 2016.
Rebecca Katz: Well, good afternoon and welcome to this live Vanguard webcast. I'm Rebecca Katz. And even though it is sunny, it's almost 70 degrees outside, feels like spring, it is actually winter, minus the snowmen.
So it is that time of year when we come and we talk about our outlook for 2016 for the global economy, the U.S. economy, and the world financial markets, and there is no one better to give us this world view than Vanguard's very own global chief economist, Joe Davis. Thanks for being here, Joe.
Joe Davis: Thanks Rebecca.
Rebecca Katz: It's great to have you. So, as long-time viewers know, we don't spend a lot of time up front on chitchat or slides. We get right into your questions. Many of you sent questions in advance. We'll take a lot of those. I have them here, but you can continue to send questions our way. You could also tweet them to us using #VGLive.
And before we get started, a couple of things. If you haven't used our webcast bureau before, there is a widget or a little icon at the bottom of your screen. There's a blue one if you have technical support needs. There's some people on standby to help answer your technical questions. And, also, if you'd like to read up on our topic today, we have some of Vanguard's thought leadership. All you have to do is click on the green resource widget, and you can look at articles and white papers about today's topic.
So, Joe, I thought we'd get started by taking a pulse of our viewers, see who we have online today and what their mood is.
Joe Davis: Yes, great idea.
Rebecca Katz: So on your screen you should see our first poll question. And what we'd like to know is: Are you an optimist, a pessimist, or maybe uncertain about the U.S. economy? So please respond now. We'll get those results in just a few seconds and share them with you.
So, Joe, we've talked about cautious optimism, we've talked about resiliency. So our first question is the best one to start with. It's from Andrea in Knoxville, and she says, "What's your outlook for 2016? How are you feeling?"
Joe Davis: You know, not as pessimistic as I think sometimes you can read in the newspaper or online, I mean central to, and you mentioned, Rebecca, resiliency. We still feel that way, and I think that's been borne out through the course of this year.
So, in other words, to be more clear or more explicit, the U.S. economy, our expectation was and continues to be that growth was going to hold up in an otherwise fragile world, right? There's weakness at times in the emerging markets, and China, Japan, and Europe have yet to really accelerate meaningfully, and so a lot rests on the shoulders of the U.S. And that was our expectation that continues.
We see that in the data even in the past few weeks where the labor market continues to just deliberately add jobs at a meaningful pace, so much so that the unemployment rate continues to come down.
So are there headwinds? Sure. I'd love to see wage growth at a higher level for the average American. We still have high debt levels at the government level, longer term. But, nevertheless, it's an economy that I think is a little bit stronger than I think the most pessimistic out there would have you believe.
Rebecca Katz: Okay, and we're going to talk about some of the impacts of next week's interest rate decision—
Joe Davis: Sure, sure, definitely.
Rebecca Katz: —things like that coming up. But why don't we see if we know how our audience is feeling, and then we'll dive into some of those details. We asked, are you optimistic, pessimistic, or uncertain about the economic future. And when we look, well, we have about 50% of our viewership that's uncertain. Only about 15% of our viewers are pessimists, and for the rest, 35%, the glass is half full.
Joe Davis: That's actually interesting. You know, we are actually seeing that, so it's skewed a little bit toward optimism. You know, we, obviously, see that, even in business and consumer confidence. If you ask executives at corporations, you ask U.S. consumers, they're actually much more confident, relative to the dark days of 2008 and 2009 when you and I were having those webcasts as well, Rebecca.
So I think it's understandable really to see that. I think the strong performance of the financial markets, fixed income, and particularly the equity markets probably, certainly would, I would argue, have had some role in everyone feeling more confident today than before. But the primary reason, clearly, is the increasingly tighter labor market and greater employment opportunities for many workers.
Rebecca Katz: Okay, yes, let's continue to talk about that. So I did mention the interest rate increase. I know a lot of people are staying tuned, assuming that interest rates will go up. So we'd like to know in our second polling question which of the following would be your reaction, your response to an interest rate increase. Would you increase your bond allocation, would you decrease your bond allocation, or would you make no changes to your portfolio? You know what the Vanguard answer is, right? But please respond now, and we'll share those results in a few moments.
So why don't we dive into some of the questions that we've received if you're going to really unpack some of the things you teed up. Our second question is from Alexis in Hoboken, New Jersey, who says, "What factors determine the outlook for the following year?" So what does your team look at? You mentioned a few times labor market. Is that the number one factor?
Joe Davis: No. I mean I think there's a number of factors. You know, I'd like to say at Vanguard we take, you know, there's a qualitative, you know, you use a lot of judgment, experience. We also use a lot of quantitative analyses of data sources, some of which that we would view as proprietary. Things that you will hear, even things such as big data, get a sense of trends, not just in the labor market.
Labor market's clearly one, Rebecca. Get a sense of where inflation trends are going and also what the financial markets are assessing in terms of risk relative to, say, what the average economist or investment strategist would say. And so we take that in the backdrop of our statistical analysis, and then we weave that together.
So, again, I'm not avoiding the question. There's actually hundreds of statistics that we will look at, but ultimately we use that and place over that a heavy dose importantly of human judgment and experience to inform our outlook.
And I'd say we're fairly proud of that approach. I think I see a lot in the industry, quite frankly and quite humbly, that it's either completely qualitative or it's so quantitative relying on the data that it doesn't use human judgment in it. And so we're trying to get that balance right, and I think that's served us well over the past several years.
Rebecca Katz: Yes, human behavior is very powerful.
Joe Davis: Yes.
Rebecca Katz: So I don't know if all of our viewers know, when you have your economic outlook and your team is doing this, how are you then applying it to our funds, for example?
Joe Davis: Well, I think it's very important. So there's a number of applications for those who may have investments in, say, Vanguard's actively managed fixed income funds—so our municipal bond funds, our actively managed corporate or Treasury funds.
Our economic outlook is one input, among many, of the senior portfolio management team at Vanguard to try to add value incrementally over say the benchmark. And, again, a very stellar record from our fixed income group.
And having done so over the last several years, there's also—and importantly and for those that will read the outlook—a central tenet of our economic outlook is actually inform what are reasonable expectations for the investments that we all have exposure to: equities both in the U.S. as well as outside the U.S., various fixed income investments, and even cash for money market funds such as, obviously, tied to Fed policy.
So our outlook will shift potentially the expectations of the distribution of what those returns may be, which may guide our various business units, not only just in guiding investors as what are reasonable expectations for the future because they are different today than they were five years ago. They are lower.
Rebecca Katz: Lower.
Joe Davis: And we will talk about that. We're probably lower than most in the industry, actually, but that said, that has a number of applications. For those investors who have a very long-term orientation, I think they actually should minimize some of the conversation. I think it's very important to be well-educated and to actually arm yourself with why you're continuing to execute your plan. But our framework, actually, is I would provide justification for sticking to that long-term perspective.
Rebecca Katz: And, again, if you click on the green widget, you can download or read our economic outlook and exactly what Joe is talking about. That's great. So, you know, we talked about short-term interest rates. I think that's something everybody's waiting with bated breath for. We've been waiting a long, long time for liftoff
Joe Davis: Yes, it's been a long time.
Rebecca Katz: Craig in West Chester, Pennsylvania, says, "With the Fed expected to raise short-term rates, when are we going to see more than nominal return on money market investments? So when will interest rates affect the fixed income markets?"
Joe Davis: Well, I think they've already started to. I mean the bond market, it's no surprise, already started to anticipate Fed policy. In fact, I think December 16 was when the Fed announcement, when it's extremely likely, in fact, I would be shocked if they don't raise interest rates.
I think, actually, this should be a nonevent because the bond market's already trying to anticipate the liftoff. And I think it's a very welcome sign and something, quite frankly, we thought the Federal Reserve should have done actually a little bit sooner.
But it's a welcome sign that they're raising rates, because it's a symbol that the U.S. economy, despite certain headwinds, does not need the emergency measures, that we've had to endure the past— I mean they haven't raised rates in effectively a decade.
So I think, that said, we are very clear and have expectations the Federal Reserve is going to be fairly slow in raising rates. And they will very likely stop raising rates at a level well below what even the Federal Reserve anticipates they will rise, perhaps as high as 1% is as far as they go. So I don't worry about major disruptions in the fixed income market. And if it is, it's probably more from exposure to credit risk rather than a market rise in interest rates.
Rebecca Katz: Well, that's good. We got the results from the second poll where we asked how would people react, and it's a Vanguard webcast, so we have Vanguard investors. So the majority said they will make no changes in their portfolio's asset allocation, so it must be really good to hear what you have to say around the impact to the financial markets. And a few people said, 12% said they would increase their bond allocation and 7.8% said decrease their bond allocation. So not a lot of taking action. Smart?
Joe Davis: Yes, I don't think we'll see much change in, for those investors that have exposure to fixed income intermediate, sort of part of the curve, intermediate funds and long-term bond funds. Those yields will probably not change markedly.
It's really short-term interest rates which we've talked about for some time. Long-term interest rates are unlikely to change materially because of our outlook for inflation and our strong belief that the Federal Reserve will be hard-pressed to raise rates in 2016 beyond say 1%.
Given the fact that other central banks around the world, major central banks such as Europe and Japan, who we said the past several years, are unlikely to raise rates this decade. So there's a limit to how far the Federal Reserve will be able to raise rates on a global basis. For another reason is the pressure on the U.S. dollar and the fact that inflation, although positive, is not near the levels that would warrant a marked increase in rates.
Rebecca Katz: Well, I want to come back to that and talk about oil a little bit, but we do have a question about the dollar that just came through. And this viewer is asking, "Do you anticipate that the dollar will weaken in 2016, and if so, what will the impetus be?
Joe Davis: That's a great question because that's actually the first time I've gotten that question, a prospect that the U.S. dollar could weaken because that, I think, is something that is actually a possibility that not enough investors and strategists are even entertaining.
Rebecca Katz: Why?
Joe Davis: Kind of, certainly. Why, everyone expects the U.S. dollar to appreciate, because everyone says the Federal Reserve is raising rates, most other nations are not, unless they're emerging markets and they're trying to defend their currency.
And so it stands to reason that rates rise. Respectfully, that's actually, I think, short-sided thinking because the financial markets are already anticipating those rising rates, and so surprise is relative to that forecast that should impact the U.S. dollar. And so I think it's very likely, excuse me, not very likely but very possible that the U.S. dollar, it should certainly, there's a limit to how far, how much further the U.S. dollar can appreciate.
So, for perspective, it's risen like 20% or 30% on a trade-weighted basis in 12, 15 months. It's been a very strong, almost eye-watering rise.
Rebecca Katz: Time to travel.
Joe Davis: And because of that though, if it continues to rise further, there's a limit then. It'll start to further crimp U.S. manufacturing activity, exports, and profits, so much so that that should be a retardant on the Federal Reserve from being very aggressive, which only then would underscore the possibility that the U.S. dollar would then slow its appreciation or potentially even depreciate.
So I think it's roughly, if I had to put odds on it this year, it's tough with currency, but a roughly 50/50 odds of whether the dollar further appreciates or depreciates. So I think that could be one of the surprises actually in 2016, that it actually weakens somewhat.
Rebecca Katz: Okay, great. Our next question is has the market already fully discounted the effect of the interest rate increase by the Fed or the likely interest rate increase by the Fed? And that's from Edward in California.
Joe Davis: Yes, I think that's another good question. I think it's in the process of doing so. You know, because of the Federal Reserve, I think, respectfully, they will have failed in their communication policy if something they do next week is a drastic surprise to the markets.
Rebecca Katz: If they don't raise rates?
Joe Davis: Yes, that would be a surprise and they're clearly, I think, extremely likely. I would be more definitive, but for legal disclaimers, we cannot. Very likely that they raise rates, and they also would, in our minds, we have said for some time, Rebecca, you know, right, our listeners know?
We believe in a dovish tightening cycle, which means they will articulate that it's appropriate to lift off, which we firmly believe. It's also appropriate to take a very gradual pace, which the Fed has articulated. And, finally, that they will ultimately stop raising rates at a level that's probably below 2% and below the rate of the rate of inflation. So it's still quote/unquote "accommodative." It's not overly repressive on the economy. And so I think in that regard, if they're consistent with that message, then that should be generally positive for the financial markets.
But there will be volatility associated with the data as it comes in 2016 with respect to the labor market and the strength or the lack of strength in the U.S. economy. The stronger the data is, the more likely some, at least the knee-jerk reaction could be, or the Federal Reserve is going to have to be more aggressive, the bond market is not anticipating that scenario, so there could be volatility in store.
Likewise, ironically, sometimes weaker than expected data could actually have the perverse effect of actually boosting financial markets for a time. Why? Because then it would be the interpretation, Federal Reserve won't have, they may stop raising rates very quickly, and so we would have this quote/unquote "more easier money policy stance" with us a little bit longer.
So, ironically, it's going to, that's why better luck would be a little bit more volatility in store for 2016, which is natural when you have changes in monetary policy.
Rebecca Katz: So we had a question about do we expect the Federal Reserve to increase rates multiple times in 2016. It sounds like it really depends. What do you think the key indicators are that they will be looking at? You mentioned labor. You know, you shared the other day a really interesting statistic about the number of the ratio of job-seekers to jobs, and you might want to share that with the viewers because it's really interesting how that's changed.
Joe Davis: It is. It is a tightness to the labor market. So economists look at hundreds if not thousands of data points. I like to distill the strength or the weakness in the U.S. economy, in the labor market just to one number. And that is the ratio of those Americans, unfortunately, that are looking for work, so they're unemployed, versus the number of job openings we have. And that ratio of unemployed to job openings got as high as 7:1 during the depths of the recession.
Now for reference, it's generally 2:1—two Americans looking for every one job opening. That's generally average. And today, we are almost close to 1:1. So those, including some at the Federal Reserve, have argued that there's still a massive amount of underemployment. There is pockets of underemployment, to be clear.
But, that said, some economists have argued there's a massive amount of slack. The Federal Reserve is making a grave mistake if they raise rates. Respectfully, they are emphatically wrong by the measure I just stated because 1:1 job openings to, unfortunately, Americans that are out of work, that is fairly tight. The only time we had a ratio that low was the late '90s, like in the peak of the dot-com bubble.
Now that said, those that are looking for work may not be matching the skills that they may require for the job openings. So we still have what we would call, there's pockets of what we would call structural unemployment, right, which is a long-term secular and social issue.
Rebecca Katz: Is it that they're underskilled?
Joe Davis: Yes, so that implies, or it's just that the industry that needs workers is not necessarily the industry where there's more unemployed, whether that be in construction versus medical profession. And there's data that would point to stories such as that.
So why that matters is that gets to the fact that the Federal Reserve will be looking at how low the unemployment rate is, how tight that is, as well as the inflation and the further dropdown, decline in oil prices will have a clear bearing.
But even if we use very pessimistic assumptions, by our modeling and by our framework, which by our understanding is very close to what the Federal Reverse, internally, is using, that indicator suggests that, for the first time since the crisis began in the middle of the summer, that the fed fund rate should be above zero.
In other words, you implied that, even with somewhat pessimistic assumptions, the U.S. economy no longer requires, strongly, the sort of emergency zero-bound measure and zero money market rates that we've had to witness.
Rebecca Katz: Okay, great. Well, you know, it's interesting. We have some concerns about rising interest rates, even though you've said it really is a reflection of growth. So Cynthia, in Texas, asked, "How irrational is it to fear that an interest rate hike could cause America's economy to collapse?" Now, you've said you expect small interest rate hikes or gradual, but at what point does it have a negative impact?
Joe Davis: Sure. I mean, it's a very fair question, very important question. Much more important—and I may have said this before, Rebecca in our past webcast—much more important than when the Fed lifts off, and that will be very likely in the next week, it's more important is the pace with which they continue to tighten and where they stop because that has implications for where long-term interest rates would be.
So that then impacts borrowing costs for corporations, the fixed income market, housing market and mortgage rates and, with that, the volatility in the equity market. And so that will have a bearing, but there's no statistical evidence, clearly, that that 25-basis-point change in the Fed fund rate, short-term interest rates, can have a marked impact on the economy that's over $14 trillion, right?
So, ironically, I've seen some, though, argue that. Ironically, some that have argued that are the same individuals that have argued that quantitative easing had no impact on the economy. So I can't see how one can say that quantitative easing had no impact and then, yet, fret over a 25-basis-point rise.
There is a point with which, though, the Federal Reserve could go too far, and there's evidence of that through history in various central banks. The Federal Reserve made, arguably, that policy error or mistake in 1937 coming out of the Great Depression. The ECB tried to raise rates too soon in 2011, the Bank of Japan in 1997, all areas with which the interest rates were already really low, and the economy was somewhat fragile. So that's why it's a fair question despite my previous comment.
So I don't think that 25 basis points does it. I would argue that, should the Federal Reserve— And, again, they're extremely intelligent individuals and a committee. If the Federal Reserve would, from what we know, and our forecast is correct, around 2% growth, if they would progress in raising the fed funds rate well beyond, say, 1% and inflation's not moving, wage growth is not accelerating, in that context, then I would say, you know what, they're starting to become, actually, restrictive, overly restrictive.
And I think, at that point, you could imagine the U.S. dollar further appreciating or further—question before. At that point, I would probably, all else equal, be marking down my expectations for U.S. growth. We would probably start hearing things about: What's the risk of U.S. recession?
Now, again, put yourself in that environment; the Federal Reserve is observing that environment. So it's possible, although I think they will be ultrasensitive to growth.
Rebecca Katz: Sounds fairly unlikely.
Joe Davis: Yes, it's unlikely.
Rebecca Katz: So our next question, speaking of currency, again, we have a question from Song who says, "What's your take on the economic slowdown in China and their currency devaluation against the U.S. dollar?"
Joe Davis: Yes.
Rebecca Katz: You might want to just set some context if people aren't aware of what's going on in China.
Joe Davis: Sure. So China, for reference: So, you know, 10 years ago, China's GDP growth—if we have average of 2% in the U.S. over the past 5 years—China, 10, 15 years ago was growing 14%, 15% before the global financial crisis. Rapid industrialization. One of the most rapid industrializations in human history has lifted millions upon millions out of poverty in China.
Five years ago, China was growing north of 10% while the rest of the world was languishing. Today, they're growing 7%. So the growth rate in China has come down. That's been the most intentional, telegraphed, and purposeful slowdown of economic growth that we've seen in some time. It's been purposeful.
Rebecca Katz: Really?
Joe Davis: China is trying to rebalance their economy. It's been almost entirely driven—those heady growth rates of the past—through rapid industrialization. We've seen that in manufacturing, we've seen that in massive exports, so much so that China consumes half of the world's steel, copper, and almost any other major industrial metal.
Now, that said, the key risk of China is not the 7% because that's been long anticipated. What we have focused on and we have researched on over the past 2 years was: Is China really growing at 7, or is it parts of their economy growing even weaker than that?
And we've shown evidence, in our real-time indicators... Our proprietary indicators have suggested for two years that parts of their economy have been growing below 7%, which I think explains some of the weakness we've seen in commodities in emerging markets. So I think that's the greatest tail risk in the world economy, if China would continue to further disappoint on growth.
Rebecca Katz: And who does that impact the most, other emerging markets?
Joe Davis: Other emerging markets. And why we're unlikely to see any material bounce in emerging market growth or commodity prices. I think it's hopeful and reasonable. I believe there'll be stabilization but not a reacceleration.
And I think— So why there's— So there's two things. There's quote/unquote the "bad news."
I think we should have the— Actually, I think long term is good news is that China is slowing down, becoming more balanced. If China, we woke up tomorrow and China was growing at 14%, I would actually be fairly pessimistic on future prospects for China because that would mean they were reverting to the old model of over-reliance on investment. 50% of their economy is investment. Some of it is very poorly allocated in inefficient ways, through state-owned enterprises.
They are trying to rebalance now more to the service sector and become more diversified. Should they achieve that—and I think they likely will—and escape what's called the middle-income trap, meaning become a more developed market, that's extremely beneficial for the world economy.
But it's going to be a volatile transition over the next several years. They're making progress, but we will see. I think we should be prepared for headlines associated with weakness out of China, or is China not accelerating because they're unlikely to over the next 2 years.
Rebecca Katz: But just to clarify, we're talking about weakness in their economy. It doesn't necessarily mean the markets would move one way or another, would it?
Joe Davis: No, I mean, I think there is a high sensitivity, in the short run, particularly around emerging markets and commodity markets, the China slowdown. Again, their— China's slowdown is, long term, very positive for China and hence the world, but, as we talked about in our outlook, many emerging markets are not prepared.
I think many emerging markets need a new business model. Those that have catered to over-reliance on export-sensitive, driven to China's rapid industrialization— And, again, to be clear, China will continue to industrialize and develop in the same way the U.S. economy did, Japan after World War II, and Korea.
But the balance of growth is going to shift, and they're already doing that. They've been clear in their signaling. It's just that some of the rest of the world has not adjusted. And so I think that's where we're going to continue to see some hiccups in growth over the next year.
Rebecca Katz: Okay. Our next question is about, back to the U.S. markets. Barry asks, "Why are the markets reacting so negatively to the fall in oil prices?" I know they were down this morning. I'm not sure how they're doing right now, but is this an overreaction?
Joe Davis: No, I wouldn't say it's all overreaction. I think, you know, it's another very good— All of these are extremely good questions. You know, the market's reaction—and we've shown this in the past through research—the market's reaction, equity market, fixed income market's reaction to fall in oil largely depends upon— Because it can be, believe it or not, in economics both good and bad. Why that is depends upon why oil is falling.
If it's falling because there's been a huge increase in supply, right, discovering new oil fields, for example. That was largely part of the reason, when oil dollar-per-barrel, say, from $100 a barrel to say around 60 was almost due entirely, to our estimation, to, really, increased supply, Saudi Arabia increasing more production, those coming out of Iran and Iraq as well as, obviously, for a long time, in the United States, right, ourselves.
More recently, though, it's been we can assess it more through the U.S. dollar as well as weakness in global demand. And so, there, it's not as beneficial for the financial markets because that's providing some window into, "Oh, perhaps corporate earnings, not just for energy companies but for other companies maybe we could then expect it." It's a canary in the coal mine.
So if you can read my comments that way, it's not all bad. It's hard for me to believe that if oil continues to decline further and further, further, there's not going to be a— History shows that after there's such virulent rises or falls, there's a change in the supply curve, which means someone's going to cut production. This is a game of chicken right now, quite frankly, between parts of the Middle East and United States production.
At some point, someone's going to find it unprofitable to increase generating oil. And so we should see stabilization— Now, what price? For the record, I would've thought it was in the $40 range. We've dropped below that, but I'm also not anticipating a sharp rebound in oil prices.
So but, all else equal, if oil continues to fall, fall, fall, I mean, there's a limit to how far it can go. It's still an extremely important commodity to generate energy production in the world, and that's not going to change overnight any time soon.
Rebecca Katz: Right. Well, you know, unfortunately, I guess, the stock market, as we're on air, is continuing to decline. So Todd says, "It's down nearly 300 points today, and many are saying the technicals are not good at all. So where do we see the stock market performing in 2016 and why?" And I would caveat that with we're Vanguard, so, of course, we like to give long-term predictions, not one-year predictions. But is this a signal of something worse?
Joe Davis: Well, and for context, we're not surprised to see it, as you know. And, Rebecca, we talked about this time last year, we went into 2015, and we continue going to 2016 with the most guarded capital markets outlook and equity market outlook we've had since 2006.
Rebecca Katz: And, again, you can see that under the green widget from the back.
Joe Davis: Yes, and we obviously knew what happened 2008, '09, '10. We're not extremely bearish. We're not saying that there's going to be profound negative returns for the next 5 or 10 years. But, any one year, it's very well possible. Why we do not provide 1-year forecasts is that there's not any model— Cannot generate anything, any reasonable confidence in that.
So I actually almost— You know, I dismiss and certainly laugh at times when I see some provide, with almost definitive nature, a 1-year number. Now, that means that you and I may not be on TV as much as others because we refuse to give S&P 500 targets for them—the year—if we give a huge range. I think we're actually doing a service for investors. We are providing a range of what that is, based upon historical relationships.
Over the next five or ten years, it's in that, you know, high single-digit range. Now, for reference, it is very unlikely we're going to generate the sort of double-digit returns we've had for the past 5 years. The odds are less than 1% by our statistical analysis.
So they're not extremely pessimistic. It's just, when you overlay our expectations for low inflation and the low level of interest rates, that in itself brings down the expected returns closer to, say, 7% with a range over the next 5 or 10 years, versus, say, equity markets over the past 70, 80 years in the U.S. have provided, on average 9% or 10%.
So it's lower than average. It's lower than the past 5 years, but I wouldn't characterize it as pessimistic. But, given the volatility in equities, I think it's almost very reasonable to expect periodic corrections in the equity market. We had it this time last year; it was not a surprise.
I can't time them. I can't tell any of our listeners when that will occur. I'm just saying, when I see that in the financial market, I am not surprised given our 5 or 10-year outlook that are lower.
Rebecca Katz: I see. Okay. Well, why don't we talk about the outlook for bonds since we just covered the outlook for stocks, especially if there are interest rate increases ahead?
Joe Davis: Well, our long-term contention has been, and remains so, that the low-interest-rate environment we're in is not a cyclical phenomenon; it is secular. What I mean by that is it is likely, certainly, it's not definitive, but there are central expectations—we have a fairly high level of conviction around this, Rebecca, to be honest—that interest rates will remain at a low level, long-term interest rates in the U.S., so the 10-year Treasury or mortgage rates or so forth, even with the Federal Reserve raise in rates for the next several years.
I'm not saying rates won't rise. They are very likely to rise modestly. That's central to our outlook, but they will not rise to the levels that we have been accustomed to in the past.
So short-term rates will likely rise more so than long-term rates. But long-term rates are really determined globally. And if you look at the long-term interest rates throughout the rest of the world... And, again, my previous comments, I don't think Bank of Japan or the European Central Bank are raising rates this decade. China still has more cutting to do. There's still, at the margin, a deflationary bias in the world that we've talked about for several years.
So is it possible for a market rise in U.S. interest rates? Yes. It's still the risk that I have not lost sleep over in the past, and I will not lose sleep over in 2016 even with the Fed raising rates. It's very likely to be that they raise rates, short-term interest rates; long-term interest rates do not rise much at all.
Rebecca Katz: And so bond returns, historic— You gave us the history of stocks versus where we're expecting them.
Joe Davis: Well, bonds, historically, have provided— It depends on the portfolio, but if you look at, say, total bond market index, 5%, 6%, 7%, but we all know the yield to maturity on a bond portfolio is a decent barometer of future bond returns in part because interest rates are so difficult to predict.
So if you look at the current yield to maturity, so, I don't know, total bond market portfolio say roughly 2%, interest rate 2.5%, yield—excuse me, yield to maturity—that's roughly a fair expectation for returns for the next one, three, or five years. So they're clearly muted relative to history. They're modestly above the rate of inflation relative to cash. So there is a bond risk premium out there that investors earned last year and the year before and the year before.
And, during our period of volatility in the summer, we still saw conservative fixed income investments provide some ballast or offset. Not the same sort of flight-to-quality benefit we saw, say, prefinancial crisis because rates are just lower, but they still served that role. So muted—
Rebecca Katz: Well, certainly, relative to stocks.
Joe Davis: Muted returns, but it's not this sort of fear of a market rise in rates. We've, you know, respectfully, have had that question for 5 or 6 years. I'm not complacent on it. I'm just telling you the reason why that's still not in the top 3 of our risks.
Rebecca Katz: Okay. Well, so we talked stocks. We talked bonds. So what does that lead to for a balanced portfolio outlook? And we did have an advisor named Alec, in Boston, who questioned our—I'm not sure where he got the numbers—but 5% to 7% as an outlook. But I think that sounds high. I don't think that's what we were—
Joe Davis: Yes, no. Well, central tendency is closer to that, I'd say, in that 5% to 6% range is over the next 10 years, right?
Rebecca Katz: Not 2016, necessarily.
Joe Davis: Not 2016. Again, if you say, high single digits for equity with a huge range in one-year number, and the yield to maturity, I said, on a conservative bond portfolio, roughly 2, to be fair to our listener, you could drive a truck through that forecast. But the central tendency of that would be fairly modest, right, would be fairly modest.
So I think it's fair for everyone. I mean, everyone should have what a reasonable expectation is for their investments. It's prudent. It's cornerstone to our asset allocation, central to our philosophy, any investor's philosophy.
And we've been very clear, you know, our expected returns have come down consistently every year since 2009 when everyone was concerned in financial markets. Yet, because of that fear, in part, and valuations were very low, our expected returns were very high. We will never get the actual, the specific magnitude of the future market's performance. If anything, we were too conservative.
But, as the market has performed very well, our expected returns have come down because valuations aren't—you know, certainly, they're not very cheap or—
Rebecca Katz: Well, let's talk about that. We have a question from Tong saying, "Are stock prices considered expensive now?"
Joe Davis: They're certainly not cheap, and the U.S. has valuations that are a little bit richer than, say, other markets, particularly those outside the U.S. Well, by definition, it has to be outside the U.S., right? So Europe, Japan.
Emerging markets still give me a little bit of concern given my previous comments. But investors should clearly—I would counsel investors to continue to consider, if they haven't, contemplate, and certainly maintain, counsel them to stick with a plan of a globally diversified portfolio.
The U.S. economy—The U.S. equity market has outperformed others. That does not mean it will continue to do so, and valuations are certainly not cheap. So another reason why our expected returns have come down.
That said, the biggest gap between our expected returns over the next several years and those of history, the biggest reason for that gap is just the fact that the fed funds rate, the cash rate, is at zero, which prices every other risk premium in the market: bond investments, stock investments, commercial real estate investments, private equity investments. All those expected returns are lower because the cash rate is zero.
So another reason why I would welcome, as a long-term investor, the liftoff of the Federal Reserve because over a long—despite, regardless of short-term volatility because, longer term, that would imply and argue for somewhat higher nominal returns for us.
Rebecca Katz: So, it's interesting. You said it's really important for investors to have reasonable expectations for their stock and bond market returns. And we have, out on our website or under the green widget, you can look at our investment principles, the 4 investment principles that we subscribe to. You know, and that really helps you, if you have a reasonable expectation, to better set your goals, which is really the first principle that we subscribe to.
So our next question is from Nicholas, and he says that, "Some analysts discuss the chance and the support, historical support, for a 20-year bull market." Do we think a 20-year bull market is ever possible?
Joe Davis: Well, it is possible. Again, my comments, we're not increasingly—you know, aggressively pessimistic on the equity market. I tell you, living through the past 7 years, nothing will surprise me anymore. You know, I learned—
Rebecca Katz: Added a few gray hairs or lost—
Joe Davis: I learned in college and grad school that interest rates couldn't go negative, and here we are. Interest rates, through half of the industrialized world, are negative, right? So—
Rebecca Katz: That's hard for the layman to understand. What do you mean interest rate is negative?
Joe Davis: Well, I know. Well, actually, the bank pays you. If you're in Europe or Sweden, if you have a mortgage, the bank is sending you checks.
Rebecca Katz: Really?
Joe Davis: Yes. So that's part of the world we live in now. So I said that because nothing would shock me anymore. But I think, to play that forward, if we've had 6 or 7 years, to have a 20-year bull market, would, by definition, then say we didn't have a bear market, which means, then, bear markets are highly correlated.
They happen more frequently than recessions, but they are correlated with recessions, which would mean we haven't had a recession, then, in 20 years. That would be unprecedented in the more than 200 years of our history. So I just think, you know, you play the sort of bull market. You would double the length of it and duration. You would probably see some sort of imbalances accrue, so I think it's unlikely.
It doesn't mean one should—If you were a long-term investor and, say, it's appropriate for you to have 80% of your portfolio into equities, you shouldn't still be 80% with those comments.
In fact, to expect a higher return of equities over fixed income, almost by definition, you have to stomach the possibility, in fact, and endure bear markets along the way because, if there wasn't a risk of bear markets, then why would stocks have a higher expected return than conservative fixed income? Why would you or I have to deal with the volatility, right? You have to stomach it.
Rebecca Katz: Right, you're getting paid for that risk.
Joe Davis: Yes, it's part of that. That goes with the territory. So, although it's possible, I certainly wouldn't—I would not prepare my personal finances solely based upon that scenario.
Rebecca Katz: Okay, great. Well, our next question: I sort of touched on this a little bit when we were talking about the international markets and China. Clive says, "What is the correlation between the U.S. economy and the U.S. stock market?" And my favorite paper that your group published years ago was on the correlation and relationship between economies and financial market returns, which are not 1–1. So how do we think about that? When we hear about things in the news and the economy, how should that translate into the financial markets if at all?
Joe Davis: Yes, I'd say—well, to you, and thanks for referencing that research, Rebecca—we continue to come back to it because it is, I think, an important question.
Long term, so across countries, you would think those countries that grow faster economically would imply greater corporate profit growth, hence higher stock returns. Actually, it turns out the correlation across countries between economic growth and stock returns is zero, and that was that research and chart that you're referencing that we did a number of years ago.
We actually did that at a time when economic growth in the U.S. was very low, and many investors were flocking to emerging markets 3 or 4 years ago, right, because they had higher expected growth. Ironically, since that time, the U.S. economy has vastly outperformed the emerging markets, like 50.
I mean, there's some fast number of outperformance, right? Equity markets and emerging markets haven't returned anything in the past three years, and we know what the U.S. equity market has done. So this just underscores that research.
Why there is, though, for very short periods of time, surprises in economic data tend to have a positive correlation with stock market—i.e., all else equal—generally positive news in the economy, that means implies better corporate profits, hence higher stock returns. But it's the surprises that move the market because the stock market itself is trying to expect what is fair for the economy.
So you do see that association in the near term. But, very quickly, that relationship—I mentioned zero in the long run. How does that happen from high to zero? It happens because, very quickly, out past a week, month, and certainly a quarter, the financial markets, seeing a stream of economic data, start to price in or anticipate economic growth accelerating or weakening. And so, very quickly, it's the valuation of the price paid for future growth because the stock market is judging, in real time, the future business cycle.
It gets ahead effective of the economic statistics. That's why the link breaks down. It gets ahead of them. It gets ahead of the economy. The economy is slow-moving in the sense of the data coming out. You and I and everyone else, if we were portfolio managers or professional traders, we're trying—if we were actively managed—we're trying to see, is that stock underpriced or overpriced? What we're probably looking at the economy for behind the buy, say, retail stocks, right, is the consumer holding them. So we're trying to already anticipate that news.
So the market, very quickly, is moving in that regard, and that's why the long-term association is broken down, which is why I do personally cringe when I hear, "Well, should I be out of stocks because the economy is weak or has been weak?"
When I hear past tense or current tense used to describe the economy and then implies that for what I should do in the portfolio, I really do cringe because I say, "Listen, you should only even be thinking about portfolio allocations if you can answer, positively, two questions. One, is your economic view distinctly different from that of the markets and the consensus, which means you need to know what that view is? And then, what is your view? And then, secondly, how much conviction do you have in that view relative to that?" And if you have a very high conviction, then you may want to, from a risk perspective, you may want to at least consider that.
But rarely am I, personally, for me, rarely, in my 20-year career, have I answered—I answer yes to the first one a number of times. We do it in this year's paper.
But the level of conviction also leads me—the very few times I made changes in my portfolio, I've always done it in a modest sense because I've tried to incorporate that level of conviction. Like, do I really have that much confidence over the millions of other professional investors in the market that are trying to do the same thing?
Rebecca Katz: Right, and you're looking at this stuff all day long. The rest of us aren't, so—
Joe Davis: All day long! I tell you it can be a humbling experience. I'm not saying, then, you just bury your head in the sand and don't pay attention to the economy. We're not saying that, right. We're just saying, if you put the level of confidence—and good active managers do this as well. That's why they don't put their entire portfolio in one stock or one corporate bond. They diversify because they have some level of conviction. You want that, but they're not that bold.
Rebecca Katz: Okay. Well, so we talked about the U.S. financial markets, but we have a question in from Dan, who says, "With the slowing of the global economy, what's your feeling regarding emerging markets?" And I think he means the financial markets, and so we—we've just talked about how they don't—are not necessarily correlated, but, maybe in the short term, they are. What's our outlook for emerging-market financial performance?
Joe Davis: Emerging markets, you know, you would think because they've significantly underperformed the developed market, the stock market. The emerging-market debt markets underperformed as well. They had a sharp rise in interest rates this year.
You would think, then, "Oh, that means higher future returns." Not necessarily because valuations in the stock markets, say price-to-earnings ratios, price to book, dividend yield are not at levels, at least relative to history, that would say they're really quote/unquote "cheap" by that measure.
So our expected returns for emerging market stocks are not materially higher than those of the developed market. They may be at the margin, I mean, like, basis points higher, but they also come with much higher volatility, which we have seen over the past two or three years.
So I would be very hesitant. In fact, we call out in the outlook paper, the emerging markets, we don't characterize as quote/unquote "cheap." That doesn't mean that they should be avoided. I just wouldn't jump to the conclusion that because there's a lot of pessimism and disappointing economic news, I don't think we're there yet that one would say, "You know what? The market is quote/unquote 'drastically overreacting' like it was doing in 2009."
Rebecca Katz: Right, so let me challenge you a little bit. You're saying it doesn't necessarily mean you should avoid it, but, you know, James in Oakton, Virginia, said, you know, "With all the political turmoil and with the slowdown in the economy and emerging markets, why would you suggest investing in," I think he's referring to, "international stocks of any of those countries?"
Joe Davis: Well, Oakton, Virginia, that's where my wife's from. So hometown, been to Oakton many times. I have relatives there. And, again, I mean, respectfully, I would just suggest and urge all investors, again, you do have to—I'm not saying that our client is not. You have to invest in the—you can't look backwards. I mean, you know, it's almost like the current headlines are almost immaterial.
Rebecca Katz: It's too late.
Joe Davis: The market's already reacted. It's more of, "So why do you have non-U.S. investments in your portfolio?" It is around diversification and not just, "Okay, one market is going up. The other market is going down," because they generally tend to move, not perfectly, they tend to co-move on the positive fashion.
But it's also that we don't—I don't know if emerging markets—I mean, I'm not definitively confident that emerging markets are going to underperform in the U.S. So you do it for not just diversification of return but also which market will outperform when it's not necessarily certain.
So, you know, market capitalization would suggest not a massive allocation to emerging markets. You know, we do have emerging markets as a cornerstone of a broadly diversified equity portfolio. That hasn't changed, and we would be saying that if p ratios or even the geopolitical risk was lower or higher than it is today.
Rebecca Katz: We would still be committed to having that diversified portfolio?
Joe Davis: We would still be committed to that. Well, because there's a point with which, even if, say, the news in emerging markets—I don't think—I think there's still negative events ahead for the emerging markets. And so one area of the world that has not gone through the sort of debt leveraging in the private sector, the pay down in credit and debt that the U.S. consumer did, that parts of Europe have done increasingly—so we call out that I'm not expecting any material improvement in the emerging-market economy.
But there will be a point with which—and maybe we're already there. I don't think so, but, again, who's to say I'm right, that the financial markets will say, you know what, a lot of bad news is already priced and that there's a lot of negative sentiment.
And, at that point, emerging-market expected returns go up. And, unless you can time that right, you want to be exposed to it because that time will come. And when that comes, emerging markets will outperform the developed world. But in any 3-, 6-, or 1-year forecast horizon, that's going to be tough. That's going to be tough.
That gets back to my conviction argument that our client there has a very strong conviction in that regard, then that may inform him or her at what they may want to do.
Rebecca Katz: Great. You know, you've touched on this a little bit, but we had a question from Herman in Lake Worth, Florida asking, "What role do central banks play in the global economy?" And you talked a little bit about how we have to—or, you know, our Federal Reserve has to really watch what other central banks are doing. And that may seem like a new concept for many people. I didn't know we were that interconnected.
Joe Davis: Yes, you know, it's a really good point.
Rebecca Katz: So what is the role?
Joe Davis: It's a really good point, Rebecca, because I think we are more—I mean, clearly, we have been more interconnected globally from a financial market. The economies, we trade more with each other than, certainly, we did from our grandparents' day. But the central bank, I mean, the Federal Reserve even, several months ago, first time really called out the events in China, if you recall, and a weakness overseas as a stronger than normal influence on their decision. I think that was appropriate, actually.
It actually wasn't really new. It's portrayed as new, but it was more of a gradual evolution and acknowledgement that any central bank doesn't operate independently in the sense that their decisions impact the economy, which can impact currency, can impact the economies of other trading partners. And so that just means that when they take into account their outlook, say, for the Fed for the U.S. economy, they clearly are trying to say, "Well, what's the outlook for China."
I've actually been looking for more details from the Fed of what is their expectation for growth in China? What's their expectation of growth in Europe. They are talking about it more, but, you know, despite us, the U.S. being the largest economy in the world, we do have a sensitivity, clearly, to China should they have a hard landing.
I mean, our growth would weaken if China would go into recession, materially so. So they are sensitive to that. It doesn't mean that they, say, won't raise rates in the Federal Reserve's case, but they will take into account the evolution, not only of the financial markets but other trading partners.
Rebecca Katz: Okay. Well, what's interesting is a lot of the world looked at QE and how successful that's been and has implemented quantitative easing on their own, especially in Europe when they were struggling. How is that working? Is that policy—and this is from Miller in New Mexico—has that policy been working? And I think you mentioned Spain the other day, and maybe it has been working.
Joe Davis: Well, I think, you know, first of all—and I'll cite central bankers themselves. In fact, I've had the privilege and honor of introducing former chairman Bernanke in one of our conferences last year. And, you know, he said, he said it publicly as well that, you know, quantitative easing, it works in practice but shouldn't work in theory, right? But it is, you know, and there's contention on this issue. How effective has quantitative easing been?
Rebecca Katz: And quantitative easing, for people who may not know, is where the central banks buy back bonds?
Joe Davis: Yes, they expand their balance sheet by effectively purchasing or purchasing assets that would otherwise be, you know, simplistically, otherwise be on the public market, and other investors would be buying.
So how it can work and, I think, how it has worked, to some extent, in the United States and in the ECB is, you know, by purchasing certain securities, that's a signal to the marketplace that perhaps to take on risk in other parts of the market, right?
So it can work indirectly through wealth effects, through confidence. So it's a little squishy. I've always used the phrase psychological warfare, and don't read my phrase. I mean, there's a psychological element, a confidence, right, that, to be fair, the Bank of Japan has never fully convinced the Japanese economy that they—
Rebecca Katz: I thought things were better there.
Joe Davis: Modestly, right. They've been effectively in some program of quantitative easing or similar mechanisms for a long time, long before the United States. So the track record in quantitative easing is certainly not perfect. It would be hard to characterize it as negative. But, you know, rarely have central banks—in fact, there's hardly any evidence of a central bank being successful in exiting quantitative easing.
So if there's anything of historic moment for the Federal Reserve lifting off, I think we'll have to reserve time before, to see, is, you know, hardly any central banks have exited quantitative easing. Japan was one of the first to really go into that, and they have yet to raise rates. I mean, they tried, and they had to cut rates, as I said, in '97.
But if it does impact the market, it's through the financial markets and the influence there rather than directly to, say, some economic entity. So it is indirect.
But I would tell you I firmly believe, and I have seen—you could look at statistical analysis, including that outside the Fed that, had we not had quantitative easing, that we would've had a markedly worse economy. Now, is that to say could we have done other policy initiatives, fiscal policy? Yes. That's a whole other debate. That still doesn't negate my comments.
Rebecca Katz: Yes, I think history will look back at Ben Bernanke and recognize what those policies did for us. You know, you talked about how the U.S. and international economies impact each other. So Craig in Marshalltown, Iowa, asks, "How long can U.S. growth continue without the EU recovery, too?" So if we continue to grow, does it necessitate that the EU would start growing?
Joe Davis: Yes, the EU has been—you know, they're actually, today, they're roughly growing at the same rate we are, believe it or not. They're close to 2% GDP growth, which is where we've been on a year-over-year basis. It's close to our estimate of trend for the U.S. So lower than history but positive.
So, yes, I would be much— You know, the central tenet of resiliency in the U.S. economy, there's a limit to it. I would be much more pessimistic of U.S. economic growth prospects if the European economy, today, was in the place it was three years ago, which means in recession— Because they kind of came out of it in '09, 2000, and then they fell right back in. They had a true double dip. And there was a risk, even, of a triple dip 2 years ago.
So the fact that they've had some stabilization, in fact, part of the periphery is growing strongly. But it's mixed, but, on net, it's positive. You know, Germany's has weakness, I think, in store. It's because of the slowdown in China's exports, but Ireland's growing at 6% or 7% growth rate. Portugal and Spain—areas that were decimated through their housing market, they have actually, they're climbing out of very deep holes.
Rebecca Katz: So do they look good because they're just coming off a really low base?
Joe Davis: Yes, but it's still growing. I mean, I think it's— If they were continuing to contract, the U.S. would be, really, the sole engine of growth outside of a slower China. So it's a good— Again, I think Europe is in a much better state today than they were 3 years ago.
Rebecca Katz: Well, what about Asia. So Neil, in Branchburg, New Jersey, says, "Do you foresee GDP growth rates of developing countries in Asia excluding China remaining really dependent on China?" So is everyone tied to China's growth?
Joe Davis: Well, emerging markets in Asia and various Asian economies where it's, you know, it's Singapore's, it's Taiwan's. You can go on and on. You know, they clearly have a very high exposure, in a regional sense, to China in the same ways Mexico, for example, has a high relationship to U.S. growth.
That won't change any time soon, which is why some of the biggest disappointments in emerging markets outside of commodity producers such as the Brazils of the world and Chiles have been those in Asia.
And, really, were a growth disappointment. And they grew much weaker than even we thought, and we were more on the pessimistic side of emerging markets. That's why we don't see a strong acceleration in some of the emerging markets.
Not to say it's going to get worse. I think it's just stabilization. I am not saying that—I think it's unlikely we see the sort of sharp crises we saw in the late '90s, if you recall, the Thailands, the Mexicos' currency crises, right, a rolling set of crises so much so that the Federal Reserve actually had to cut rates in '98 after raising rates in '97.
So I don't think we'll see that because there's some differences today. Emerging markets, including those in Asia, have higher foreign currency reserves than they did in the past. They didn't have the sort of pegs that kind of made them break and really fall. Their currencies have already adjusted.
But they're some of the economies I mentioned before, Rebecca, to be blunt, when I said some of the emerging markets need a new business model, and they need to do some adjustment, structural reform. It's economies such as other emerging markets in Asia that need to do that given where China is going.
Rebecca Katz: Balance is important. So we're, unfortunately, really low on time, but we have two quick questions. One is from Mayer, in Tucson, Arizona. You touched on interest rates and impact on mortgage rates. He asks, "What's the outlook for the housing market in 2016?"
Joe Davis: I would say more of the same, and it's been positive. You know, we're not—it's unlikely we will ever get—ever, clarify—next 10 years, to the sort of heady growth rates we saw in 2004, 2005, 2006. I would be really concerned if we did. But we're nowhere near the normal levels relative to population. So, but we've said, for a long time, it's going to be a slow healing in the housing market. You know, we've clearly turned the corner though.
And the tighter the apartment and multifamily market gets, the modest strength we will continue seeing in single-family housing. So it'll be a modest source of strength to the U.S. economy, you know, next year as it was this year.
Rebecca Katz: Great. And we have a question from Andrew, in Cedar Falls, Iowa. And we just talked about more modest expectations for long-term growth. He says, "I'm 22, so what advice do you have for young investors about how to get through financially challenging years with slow or potentially no growth or more modest growth?"
Joe Davis: Well, modest growth. And, again, more important to your comments before, Rebecca, more important than economic growth is the expectations for financial markets, right, and they're not all one and the same, but we do have fairly modest return expectations as a firm, a little bit lower than the industry, actually.
But I'd say focus on what you can control. So, I mean, save as much as you can.
Rebecca Katz: Save more!
Joe Davis: Save more and start early, right, because you use the power of compounding to your advantage. It's one of the, what—you know, it's the eighth wonder of the world, so to speak, right—the power of compounding, but it is extremely powerful. So I wish I had saved more when I was younger, and I had great counseling from my parents. But, if I look back, I say, "Why didn't I do even more?" So, I think, think about that.
And I think we actually, forgive me, but I would tout our own website because I think there's a great deal of education and materials that can help one through that sort of exercise. So regardless of one, at any age, there's the importance of saving within one's budget.
Rebecca Katz: I assume focusing on costs, too, because, in a low-return environment, costs matter more.
Joe Davis: Oh, yes! Well, low return to cost percentage. Oh, yes. I mean, that's regardless and another timeless principle because, yes, you get your investments net cost, after cost. I could care what the return is before cost; it's what's after. And so I think a very strong eye to that, even more so in the current environment.
And I know investors—you know, so the investors know it out there. Investors are voting with their feet and voting with their dollars because we are seeing it throughout the industry.
Those investments that are tending to attract a little bit more cash flow than everything else, when you control for past returns and you control for the headlines, it is generally going into lower-cost products both at Vanguard as well as at some of our competitors or other noteworthy firms. I think that's very—that's showing a great deal of intelligence and savvy from investors because that's going to benefit them.
Rebecca Katz: But I will say only Vanguard's organized in a way that it's in our DNA. We have lowered costs continually for 40 years.
Joe Davis: I'm trying to be balanced and not so far to—
Rebecca Katz: I'm going to be shameless because we've got more low costs coming.
So that was a great way to end our webcast, Joe. Thank you. I mean, an hour always flies by with you. Thanks so much.
Joe Davis: No, thank you, Rebecca. Thank you.
Rebecca Katz: And, to all of you out there watching, thanks for joining us this afternoon. We will be sending out an email in a few weeks with links to highlights from today's broadcast and a transcript for your reading ease. And if you will look down at those widgets, once again, there's a red one. We'd really like to know your feedback on today's show and also on what you might want to see in the future.
And, of course, from all of us here in Valley Forge, from Joe and from me and the rest of the Vanguard family, we hope that you and your family have a wonderful holiday season and a happy, healthy new year. Thanks for being here.
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