But you consign the world's largest economy to the dustbin of history – as some global market economists were doing at the end of 2008-9 – at your own peril.

Vanguard's latest Economic and Investment Outlook* looks at the future of global economic growth, inflation, interest rates and share and bond market returns for the next 10 years. For the first time since the start of the global financial crisis the outlook for US economic growth shows the potential for above trend growth driven by a cyclical rebound.

According to the authors of the Vanguard economic outlook, led by chief economist Joe Davis, the US economic outlook can best be described as "resiliency" which is driven by the progress made in reducing consumer debt and the potential for business investment to accelerate business investment thanks to the health of corporate balance sheets.

However, the authors say big risks remain in terms of policy uncertainty spikes around issues like the debt-ceiling debate that occurred in mid-2011 that have the potential to impose an "uncertainty tax" on the US economy.

A key issue for investors to watch in the years ahead is the unwinding of the quantitative easing. The initial taper announcement has so far been judged a success because the announcement had largely been priced into fixed income markets during the year as the Federal Reserve continually dropped hints. While the tapering of the program may have begun, actual monetary tightening is likely to be some time off as the unwinding process is expected to be a multi-step, multi-year process.

On a global level for the first time since the financial crisis Vanguard's leading indicators point to a slight pick up in near-term growth not just for the US but also parts of Europe and other selected developed markets. However, just as strong sharemarket returns are possible during periods of subpar economic growth the expected 10-year return on global equity markets has shifted lower to the bottom of the 6-9 per cent range compared to this time last year. That is a reflection of market valuations following last year's strong performance and the authors warn of signs of froth in certain segments of the global equity market and in particular urge investors to be cautious about making strategic or tactical portfolio changes that would increase this risk.

The Australian economy disappointed in 2013 with sluggish growth so the question is will the year ahead be better?

The main reason for the economic growth disappointing last year was the earlier than expected peak in mining investment. The Reserve Bank of Australia has pinned its hopes on non-mining business investment and household consumption picking up in the next few years. If that does not eventuate then economic growth is likely to again be disappointing.

The start of a new year is a common time to rebalance portfolios but the economic outlook and the context of last year's strong sharemarket returns suggests that investors need to be cautious about increasing risk – for example by moving from cash and fixed income to shares.

Investors shifting asset allocations to riskier markets should be realistic and understand that their portfolio is likely to be more volatile as a result of chasing the higher return.

* Vanguard's economic and investment outlook authored by Joseph Davis, Roger Aliaga-Diaz, Charles Thomas and Andrew Patterson of Vanguard's Investment Strategy Group.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
17th January 2014