Preparing A Soft Landing

Neuberger Berman profile picture
Neuberger Berman

By Brad Tank, Chief Investment Officer - Fixed Income

The Fed is prudently downshifting gears to avoid slamming on the brakes in 2019.

Some things in the financial markets tell you a lot; others don't tell you very much at all, despite the attention and commentary they get.

In our view, the shape of the U.S. Treasury yield curve is in the second category.

If you read any market commentary last week, you'll know that when the spread between the two- and 10-year yields has inverted in the past, it has been followed by a U.S. recession in 18 months, on average. Same for the spread between the two-year and five-year yields, which did invert last week.

We no longer believe the U.S. yield curve contains information about imminent U.S. recession, simply because, while rates at the short end of the curve are indeed influenced by the Federal Reserve responding to the domestic economy, yields at the long end are set by global growth and inflation. The U.S. might well be in recession in two years' time, but a flat yield curve today tells us little besides the fact that the Fed is running higher rates than most of the rest of the world.

Still, something is evidently spooking investors. We think it is just an overreaction to what ought to be a "soft landing" for the U.S. next year.

The Fed Downshifts Gears

Until October, investors were pricing in an environment in which U.S. growth could power ahead undimmed even as the rest of the world slowed down. We have long expected the situation to re-converge, not least because U.S. stimulus is due to wear off and China stimulus is being reintroduced. There are undoubtedly tail risks out there, such as a failure either of China's stimulus efforts or U.S. - China trade talks, which were not helped by the confusion around the G20 outcome and the arrest of Huawei's CFO last week. Nonetheless, our central scenario is for the U.S. to revert to its long-term trend growth rate of around 2.0 - 2.5% in 2019, as the rest of the world did this year.

Twelve months ago, the Fed was forecasting flat forward rates in 2020. It didn't call that a soft landing, but that's what it implied. Our view is that the likelihood of these conditions has simply shifted from 2020 to 2019.

The market's concern is that the Fed fails to see this slippery patch on the road dead ahead and keeps pressing its foot down on the brakes. Overshoot with rate hikes in these conditions and it could send the economy into a skid. Sure enough, the last set of Fed dots for 2019 appear too high and, even after the correction last week, we think the market is pricing in more hikes than 2019 will ultimately need.

But as we have seen, the Fed is already shifting down the gears in its rhetoric. Chairman Jerome Powell could not be clearer that the central bank's attention to the economic data will become more acute as its ability to forecast conditions 12 months out diminishes. That gives us confidence that we will likely see a rate-hike pause soon - perhaps even as soon as this month's meeting.

Selective Exposures in Medium-Quality Credit

What does a soft landing - slower U.S. growth and the Fed on pause - imply for investors?

It likely means a steady, flat yield curve; the potential for equity multiples to expand modestly even as earnings growth declines; elevated market volatility; and higher cross-asset correlations paired with wider, fundamentals-driven dispersion within asset classes.

Overall, it means that we are not likely to see the end of the cycle in 2019, and so we do not believe now is an opportune time to avoid credit risk indiscriminately, but rather a time to emphasize patience and selectivity in the credit risk one takes.

For us as investors, that means short- to intermediate-maturity credits in medium-quality issuers are more attractive. Remember, we have had the risks associated with BBBs and bank debt on our minds for some time, and that cautiousness has served us well in the recent volatility. It has given us the opportunity to select carefully from emerging markets, the higher-quality names in high yield, and some of the riskier names in investment grade and structured products.

The markets are echoing with a tremendous amount of noise right now, but we think that is distracting investors from what we view as the most likely outcome of 2019: a pause at the Fed, a soft landing for the U.S., and a re-convergence of global growth around the slower levels that have generally prevailed post-financial crisis. With that as the background, adding some quality credit spread to what are relatively high short-dated U.S. yields has the potential for risk-adjusted returns that could be attractive next to longer-dated fixed income, broad high yield or equities.

In Case You Missed It

  • ISM Manufacturing Index: +1.6 to 59.3 in November
  • U.S. Purchasing Managers' Index: -0.1 to 55.3 in November
  • Eurozone Purchasing Managers' Index: +0.3 to 52.7 in November
  • ISM Non-Manufacturing Index: +0.4 to 60.7 in November
  • U.S. Employment Report: Nonfarm payrolls increased 155,000 and the unemployment rate remained the same at 3.7%
  • Eurozone 3Q18 GDP: +1.6% annualized rate

What to Watch For

  • Tuesday, 12/11:
    • U.S. Producer Price Index
  • Wednesday, 12/12:
    • U.S. Consumer Price Index
  • Thursday, 12/13:
    • European Central Bank Policy Meeting
    • Japan Purchasing Managers' Index
  • Friday, 12/14:
    • U.S. Retail Sales

- Andrew White, Investment Strategy Group

Statistics on the Current State of the Market - as of December 7, 2018

Market Index WTD MTD YTD
S&P 500 Index -4.6% -4.6% 0.3%
Russell 1000 Index -4.5% -4.5% 0.0%
Russell 1000 Growth Index -4.8% -4.8% 2.6%
Russell 1000 Value Index -4.3% -4.3% -2.9%
Russell 2000 Index -5.5% -5.5% -4.6%
MSCI World Index -3.7% -3.7% -4.4%
MSCI EAFE Index -2.3% -2.3% -11.0%
MSCI Emerging Markets Index -1.3% -1.3% -13.1%
STOXX Europe 600 -2.8% -2.8% -13.5%
FTSE 100 Index -2.9% -2.9% -8.2%
TOPIX -2.8% -2.8% -9.0%
CSI 300 Index 0.3% 0.3% -19.3%
Fixed Income & Currency
Citigroup 2-Year Treasury Index 0.3% 0.3% 0.9%
Citigroup 10-Year Treasury Index 1.5% 1.5% -1.5%
Bloomberg Barclays Municipal Bond Index 0.7% 0.7% 0.8%
Bloomberg Barclays US Aggregate Bond Index 0.9% 0.9% -1.0%
Bloomberg Barclays Global Aggregate Index 0.9% 0.9% -2.3%
S&P/LSTA U.S. Leveraged Loan 100 Index -0.5% -0.5% 2.1%
ICE BofA Merrill Lynch U.S. High Yield Index -0.1% -0.1% -0.2%
ICE BofA Merrill Lynch Global High Yield Index 0.0% 0.0% -2.3%
JP Morgan EMBI Global Diversified Index 0.8% 0.8% -4.7%
JP Morgan GBI-EM Global Diversified Index 0.4% 0.4% -7.1%
U.S. Dollar per British Pounds 0.0% 0.0% -5.7%
U.S. Dollar per Euro 0.6% 0.6% -5.1%
U.S. Dollar per Japanese Yen 0.8% 0.8% 0.0%
Real & Alternative Assets
Alerian MLP Index -1.2% -1.2% -4.5%
FTSE EPRA/NAREIT North America Index 0.4% 0.4% 5.1%
FTSE EPRA/NAREIT Global Index 0.6% 0.6% -0.1%
Bloomberg Commodity Index 1.2% 1.2% -3.6%
Gold (NYM $/ozt) Continuous Future 2.2% 2.2% -4.3%
Crude Oil (NYM $/bbl) Continuous Future 3.3% 3.3% -12.9%

Source: FactSet, Neuberger Berman.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. 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. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. The firm, its employees and advisory accounts may hold positions of any companies discussed. All information is current as of the date of this material and is subject to change without notice. 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.

This material may include estimates, outlooks, projections and other "forward-looking statements." Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit for the specific entities and jurisdictional limitations and restrictions.

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

© 2009-2018 Neuberger Berman Group LLC. | All rights reserved

This article was written by

Neuberger Berman profile picture
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 important disclosures:  Contact Us: Advisor Solutions (877) 628-2583 RIA & Family Office (888) 556-9030

Recommended For You

Comments (1)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.