Observations on Current Volatility

September 19, 2022

Our Investment Strategy Group shares their observations on current volatility within the financial markets.

We have continued to see a push-and-pull dynamic between the Federal Reserve and the market for the better part of 2022. In the first half of 2022, it was the market bullying the Fed to take inflation seriously and to increase interest rates. The second half, thus far, has been marked by the Fed “throwing its weight around” and the market (re)learning the old adage of “don’t fight the Fed.” The inflation print last week led to a broad-based repricing of the Fed “terminal rate” expectations (i.e. the anticipated peak or top fed funds rate for this hiking cycle). During the summer rally, the market was expecting the terminal rate to be between 3.3% to 3.7%, but that number has continued to drift higher in recent weeks. With the August inflation data coming in above consensus expectations, the market is now pricing in a terminal rate above 4.25%. Higher interest rates typically negatively impact longer duration assets such as long-dated bonds and growth-oriented stocks. This is why, in our view, the market reacted to the news so negatively last Tuesday. For reference, the S&P 500 Index fell more than 4% that day, while interest rates across the yield curve rose significantly: The U.S. two-year Treasury yield rose 18 basis points (bps), the five-year yield rose 13 bps, and the 10-year yield rose 5 bps.

We maintain a defensive positioning view within portfolios by overweighting cash and underweighting risk assets. We were wary of the summer market rally that saw S&P 500 Index bounce over 17% from its lows in mid-June, only to give up most of these gains in recent weeks. Our summer rally skepticism was largely driven by the following concerns:

First, we need to see a deceleration of inflation over handful of months. While July’s inflation report was a positive sign, in our view, August’s report was clearly a step backward. Broadly speaking, inflation pressures are easing but the Fed wants to be certain before considering a pause in rate hikes. With the labor market (and wages) continuing to show resilience, we believe the Fed will likely maintain its aggressive stance to tighten financial conditions and continue to increase interest rates. We’ll need to see labor demand weaken and labor supply increase (i.e., unemployment rate to increase, jobless claims to increase, etc.). In other words, economic growth must slow for the Fed to think about pausing and see rates markets stabilize (i.e., the US 10-year Treasury has gone from the mid-2%s to mid-3%s and back in the last three months) in order for equity markets to stabilize.

Our second concern revolves around earnings. In the second quarter, corporate earnings were generally mixed but, in the aggregate at the index level, they were positive (+6 – 7% year-over-year). However, if investors dig deeper and strip out Energy sector earnings, earnings were actually at minus 4%. Following commentary and forward guidance from company earnings announcements, concerns remain about companies’ ability to maintain profit margins. In a typical recession (which has not yet been “called”) earnings have fallen about 17%, and we have not seen that yet. However, for calendar years 2022 and 2023, consensus earnings estimates are still expected to increase by nearly 8%, which is a bit optimistic in our view.

The third factor that gives us pause is the market’s expectation of what the Fed will do going forward. The market is looking for the Fed to start cutting interest rates next year—the “Fed pivot”—because economic growth is anticipated to slow. This may or may not happen. We believe the Fed is seeking to avoid the mistakes of the 1970s when it increased rates rapidly and then took its foot off the pedal, only to see inflation rise again. We believe the Fed will look to avoid that outcome at any cost. With the August inflation data print, the market is now pricing in a more “hawkish” (higher) interest rate backdrop for late 2022 and 2023.

As mentioned, our positioning view is more defensive with increased cash on hand, reduced or rebalanced the composition of our equity exposure, and, in general, sought more high-quality positioning throughout client portfolios. We will continue look for tactical opportunities to add to equity and fixed income exposures as the market continues to retest lows established in mid-June (S&P 500 level of 3,666 and 10-Year Treasury yield of 3.5%).


This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Diversification does not guarantee profit or protect against loss in declining markets. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

The views expressed herein may include those of Neuberger Berman’s Investment Strategy Group (ISG). ISG analyzes market and economic indicators to develop asset allocation strategies. ISG consists of a team of investment professionals and works in partnership with the Office of the CIO. ISG also consults regularly with portfolio managers and investment officers across the firm. The views of ISG may not reflect the views of the firm as a whole, and Neuberger Berman advisers and portfolio managers may take contrary positions to the views of ISG. The ISG views do not constitute a prediction or projection of future events or future market behavior.

The information in this material may contain projections, market outlooks or other forward-looking statements regarding future events, including economic, asset class and market outlooks or expectations, and is only current as of the date indicated. There is no assurance that such events, outlook and expectations will be achieved, and actual results may be significantly different than that shown here. The duration and characteristics of past market/economic cycles and market behavior, including any bull/bear markets, is no indication of the duration and characteristics of any current or future be market/economic cycles or behavior. Information on historical observations about asset or sub-asset classes is not intended to represent or predict future events. Historical trends do not imply, forecast or guarantee future results. Information is based on current views and market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Discussions of any specific sectors and companies are for informational purposes only. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. The firm, its employees and advisory accounts may hold positions of any companies discussed. Nothing herein constitutes a recommendation to buy, sell or hold a security. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Investments in private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in private equity are intended for sophisticated investors only.

Neuberger Berman Investment Advisers LLC is a registered investment adviser.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.