Understanding and adapting to rapidly changing market dynamics may be crucial for investors this year.

The current decade is just getting started but has already been filled with plot twists that few saw coming. Amid so much worry about the pandemic, health and safety, the economy, the markets and political division, the performance of equities has been a key narrative, with strong double-digit gains in each of the past three years.

As we move toward the mid ‘20s, we are reaching perhaps the close of one chapter and the start of another. In particular, with a resilient economy and meaningful spike in inflation, the Federal Reserve has voiced readiness to pull back from its current level of support, starting with removal of bond purchases by March, along with three or four rate increases over the course of the year. As noted by Joe Amato in his outlook, this could have a significant impact on the markets, in the form of heightened price volatility. However, the strength of corporate earnings could help offset ongoing headwinds and result in gains in equities—although likely more modest than we’ve seen over the past three years.

For investors, we believe a key task is to revisit portfolios to ensure that asset allocations are not only closely aligned with personal goals, but that they fully address opportunities and potential risks that may be present across markets. In equities, this may mean assessing value and equity income weightings relative to growth, as well as looking at non-U.S. allocations for possible underexposure. In fixed income, it may involve drawing on multiple sectors and geographies to create return and yield potential given low-but-rising rates and elevated inflation. Where feasible, we also favor exploring alternative investments for diversification and return potential. Our Investment Strategy Group discusses the blurring lines between public and private real estate and how they can be employed in a highly tailored fashion for investors.

In our view, wealth planning should work in tandem with investment strategy—something we believe is especially true today with President Biden’s “Build Back Better” agenda weakened but still potentially viable. As Sam Petrucci, our Head of Advisory, Planning and Fiduciary Services, notes, many of the most extreme proposals appear off the table, but others remain—suggesting the advantage of employing an array of familiar planning techniques, including those that may benefit from the current low-rate environment while it lasts.

Addressing climate change is important to many of our clients. Also in this issue of Investment Quarterly, our ESG Investing team highlights recent advances in seeking to achieve global net-zero emissions. Finally, our friends at Sotheby’s provide insights into the budding NFT market and its potential effect on the art world.

I hope you enjoy IQ. Please reach out to your Neuberger Berman team with any questions about the markets, portfolios or planning issues.

Highlights 1Q 2022

From the Asset Allocation Committee

The robust economy, and positive earnings and default outlook, make the case for risky assets this year, although inflation and higher interest rates could increase volatility.

Equities: U.S. small and mid-cap stocks, as well as non-U.S. developed and emerging markets, appear to provide value compared to U.S. large caps. Across U.S. equities, we favor value and cyclicals, as well as equity income, which provides relative value and less sensitivity to rates.

Fixed Income: With low yields and a likely upward trend in interest rates, investment grade bonds generally offer limited return potential. We favor high yield, floating-rate loans and private debt; emerging market debt valuations remain appealing even as some risks increase.

Commodities: Commodities could provide exposure to a surge in pent-up demand, as well as a hedge against potential elevated inflation. Gold and other precious metals could serve as a safe haven during near-term uncertainty.

Private Equity and Real Estate: While private equity valuations appear elevated, a focus on operational improvements to businesses may create value away from potential public market volatility. Private real estate is enjoying tailwinds from economic reopening and inflationary pressures.

All views are over the next 12 months unless otherwise stated. See disclosures at the end of this publication, which include additional information regarding the Asset Allocation Committee and the views expressed.