Our 2022 Capital Market Assumptions

Our annual forecast, which is based on a 10-year investment time horizon, is intended to guide investors in developing their long-term strategic asset allocations.

The annual publication of our 10-Year Capital Market Assumptions (CMAs) affords the opportunity to share our projections for asset class returns, volatilities and correlations over the next decade. We consider this yearly exercise to be of importance given the role played by the CMAs in shaping the design of our investors’ long-term policy portfolios. This year, we take into account higher inflation, a moderating pace of growth, the transition away from extremely accommodative policy, and current capital market conditions.

The CMA paper discusses three key findings of our 10-year outlook:

  • Inflation is expected to increase moderately
  • Traditional fixed income anchors are likely to generate negative real returns
  • Alternatives will need to play a larger role in portfolios to combat the low yield environment

INFLATION: TRANSITORY OR SUSTAINED

After a decade of low inflation, price pressures have been on the rise as major economies around the world reopen. In October, U.S. consumer prices rose at their strongest pace in three decades. Unprecedented amounts of monetary and fiscal stimulus, along with supply-chain disruptions, labor shortages and a host of other catalysts, have contributed to a run up in inflation.

The debate whether this will prove to be transitory or sustained, depending on which metric you use, varies. Supply chain issues and other costs associated with reopening appear to be showing signs of abating, while labor shortages and wage growth may be longer-term catalysts. As a result, we have weighed supply-side price increases against longer-term structural factors such as demographics, globalization, and technological improvements in considering if higher inflation will be transitory or sustained (see Exhibit 1). To create our three-year economic and recessionary scenarios, we’ve also considered some of the uncertainties surrounding inflation and the Federal Reserve’s policy response.

Inflation Debate

Chart showing transitory versus persistent inflation

METHODOLOGY: PLANNING FOR UNCERTAINTY

Like last year, there is still a notable degree of uncertainty. In partnership with the BNY Mellon Investment Management Global Economic and Investment Analysis Group, we have incorporated a scenario-based approach to estimating three key inputs into our return forecasts: short-term interest rates, inflation and GDP growth. We have assigned probability weights to plausible three-year recovery and recessionary scenarios, including two that outline if higher inflation proves stickier than anticipated. 

Planning for uncertainty chart

Click to open chart in a new window

The probability weighted average estimate for each input is then incorporated into our CMAs. At the margin, this approach has resulted in only modest year-over-year adjustments to our forecasts. With most of the recovery behind us, we have lowered our forecasts for real GDP growth to 1.9% in the U.S., 1.3% in non-U.S. developed, and 3.2% in emerging markets. Although supply-chain disruptions, higher energy prices and labor shortages have resulted in elevated inflation this year, especially in the U.S., our view is that inflation will prove mostly transitory. Still, near-term pricing pressures have led us to increase our longer-term inflation assumption by 0.6% from 2.4% to 3.0%. 

Overall, our 10-year return forecasts are generally lower compared to last year with the exception of fixed income returns, which are slightly better due to modestly higher starting-point yields. We expect equity markets to deliver mid-to-high single-digit returns, slightly below our 10-year forecast from last year. Alternative asset classes should provide an additional source of return and diversification, especially those most sensitive to inflation.

Asset Class Assumptions

Chart showing assumptions for asset classes

KEY PORTFOLIO IMPLICATIONS

The most important conclusions we draw from the report relate to their profound investment implications. Similar to the investment implications we outlined last year, it is important to consider diversification, a search for yield and inflation protection when creating goals-based, long-term policy portfolios aligned to client goals. 

In last year’s CMAs, we emphasized that a traditional balanced portfolio of U.S. Equities (60%) and U.S. Investment Grade Bonds (40%) will struggle to generate stable capital growth over the next decade. This belief resulted in the diversified nature of our goals-based policy portfolios, introduced to Wealth Management clients in mid-2020.

Our policy portfolios are diversified and include a range of assets that can perform well in a variety of economic and market backdrops. They have been stress tested under various scenarios, including one of rising inflation. Despite a more challenging decade of muted returns, low interest rates and modestly higher inflation, we believe the recommended actions below will allow investors to continue achieving their goals.

Actions to Consider

Chart showing actions to consider for various goals

CONCLUSION

CMAs are utilized across a range of investment and planning activities. These assumptions influence our strategic asset allocation models, which are tailored to our clients’ objectives and risk tolerance as well as tax sensitivity. From this starting point, we recommend tactical asset allocation shifts based on shorter-term market dislocations as well as tax sensitivity, where applicable.

We welcome you to review our 2022 Capital Market Assumptions. As you navigate the next decade, we at BNY Mellon Wealth Management are available to help you review these assumptions as they relate to your investment plan.

Download this executive summary in PDF here

Download the full Capital Market Assumptions here

Sign up for our webcast on December 15th at 1pm ET. 

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