“We must free ourselves of the hope that the sea will ever rest. 
 We must learn to sail in high winds.”
 - Aristotle Onassis

This quote from Mr. Onassis, a famous Greek shipping tycoon, is valuable advice not only for sailors, but also for equity investors as they contemplate the future.

Looking back on the first half of 2015, there were notable events in many regions of the world that resulted in choppy seas and volatile crosscurrents. For example, in the U.S., severe winter weather, the lengthy West Coast port strike, a rising dollar, and weak consumer and business spending led to a surprising decline in first-quarter GDP. These cold winds subsided as the spring unfolded, the weather improved, and the consumer got back to doing what consumers do best – spending money. In contrast, the winds of optimism were blowing strongly on the European continent in response to quantitative easing by the European Central Bank, and there was evidence of a modest pickup in economic activity relative to diminished expectations. This momentum was reversed in the second quarter as attention turned to the unfolding drama in Greece and its impact on the rest of the Eurozone. 

As we look out over the horizon for the balance of 2015, we continue to see a tug of war between powerful crosscurrents that are likely to continue to create turbulence and investor anxiety, some of which are illustrated in the grid to the right. In the U.S., increasing evidence of spending by consumers and businesses, coupled with a benign inflation environment, is likely to bolster confidence in the outlook for profits. Corporations are likely to see upward pressure on wages in coming months and will have to grapple with continued volatility in currency markets. However, in our view, the benefits from lower commodity prices and operating leverage from solid cost control are likely to offset a good amount of the pressure from higher wages.

We believe all of these factors are supportive of higher stock prices. The flip side of this good news is that the Federal Reserve is likely to be pushing interest rates higher by year end, which historically has lowered the price-earnings (PE) multiple of the stock market. The two countervailing forces are likely to keep investors on high alert and contribute to the choppy seas we have been calling for in 2015.

In Europe, the crisis in Greece has drifted the Eurozone into uncharted waters. While Greece is a minor player economically (its GDP is approximately the same as Louisiana’s), a “Grexit,” or a resolution that is suboptimal, will serve to increase overall uncertainty, dampen economic activity, and raise risk levels. The resultant downward pressure on PEs could be exacerbated by increased geopolitical tensions in Eastern Europe or the Middle East, which would be an unwelcome development that would offset the nascent signs of economic and profit improvements evidenced in the first half of the year in Europe.

In assessing the conditions that lie ahead, we continue to prefer the relative certainty of the improving economic backdrop of the U.S., despite headwinds posed by higher wages and the threat of higher interest rates. If the Fed’s moves are gradual, and are reflective of an improving pace of economic growth in the U.S., the environment should be conducive to higher stock prices. In contrast, we believe that continued structural problems in Europe are likely to hamper any cyclical rebound in European economic growth. As a result, we reiterate our overweight in U.S. equities.

positive and negative impact graph

City National Rochdale, LLC is a Registered Investment Advisor and wholly owned subsidiary of City National Bank.

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Important Disclosures 

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.

Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Core Personal Consumption Expenditures Price Index (core PCE) is the personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

Shanghai Composite Index (SHCOMP): A capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

Shenzhen Composite Index (SZCOMP): An actual market-cap weighted index (no free float factor) that tracks the stock performance of all the A-share and B-share lists on Shenzhen Stock Exchange.

MSCI China Index (MXCN): A free-float weighted equity index. It captures large and mid-cap representation across China H shares, B shares, Red chips and P chips.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.