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Eyes On The Pressure Gauges

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Neuberger Berman

By Erik Knutzen

As the economic machine speeds up, where on the dashboard do we look for pressure?

The market certainly blew off some steam in the days after my last, cautionary Perspective on inflation risks. It felt like an important moment. If the economy is a machine, financial markets are its pressure-release valves and market levels are its pressure gauges. When markets let off steam, it's a sign that eyes have turned to those gauges, watching for needles moving into the red.

In our most recent Asset Allocation Committee (AAC) Outlook, we anticipated that the transition into a new environment of rising inflation expectations, rising rates and faster growth would take us into more normal volatility conditions. The turbulence we got a month ago came earlier than we expected, but it was a characteristic response to late-cycle inflationary growth. Risky assets have bounced back and implied volatility has settled to historically normal levels of around 15-20, neither as high as in early February nor as low as through 2017. The risk of recession this year appears remote, and investors are still buying the dips rather than becoming defensive.

But now, unlike last year, all eyes are on the dashboard.

Three Key Pressure Gauges

I have been on the road a lot this year, from the U.S. Great Lakes to Japan to Europe, and investors have nearly always asked me the same question: Which gauges are we watching most closely, and where do we think the red zones are?

Of course, our dashboard is crammed with instruments monitoring market prices, equity valuations, corporate earnings and a raft of macroeconomic releases. Three gauges are particularly important to us right now, however.

The trigger for the sell-off a month ago was an unexpectedly strong U.S. wage-growth print, which followed an already substantial rise in

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Neuberger Berman, founded in 1939, is a private, independent, employee-owned investment manager. The firm manages a range of strategies—including equity, fixed income, quantitative and multi-asset class, private equity and hedge funds—on behalf of institutions, advisors and individual investors globally. With offices in 23 countries, Neuberger Berman’s team is more than 2,100 professionals. For five consecutive years, the company has been named first or second in Pensions & Investments Best Places to Work in Money Management survey (among those with 1,000 employees or more). Tenured, stable and long-term in focus, the firm has built a diverse team of individuals united in their commitment to delivering compelling investment results for our clients over the long term. That commitment includes active consideration of environmental, social and governance factors. The firm manages $323 billion in client assets as of March 31, 2019. For more information, please visit our website at www.nb.com.For important disclosures: https://www.nb.com/disclosure-global-communications  Contact Us: Advisor Solutions (877) 628-2583 advisor@nb.com RIA & Family Office (888) 556-9030 riadesk@nb.com

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