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US stocks face 50% odds of correction in 2020: Vanguard

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US stocks face a greater than-usual risk of a sell-off next year, with investors overconfident in an economic resurgence, according to Vanguard Group Inc.’s investment-strategy chief. “Financial markets run the risk of getting ahead of themselves,” Joseph Davis, who also serves as Vanguard’s chief economist, said in an interview Friday.

He sees 50 per cent odds on a correction in 2020, against what he terms a more typical figure of about 30 per cent. A correction is often defined as a 10 per cent drop, and the S-P 500 Index hasn’t seen one since December 2018, when it came a hair’s breadth from entering a bear market — that is, recording a decline of 20 per cent from the peak. While this year investors were too pessimistic about recession odds, next year they’ll be too optimistic on reflation, Davis said.

He also sees a pick-up in US equity volatility from “unsustainably low” levels “Across the board, expected returns for most strategies are below trailing three-year returns,” said Davis.

The investment chief for the $5.6 trillion asset manager — known more for its passive, index-tracking offerings — estimates that risk assets are pricing in close to 3 per cent US economic growth, an outcome he sees as unlikely.




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