City National Bank's investment team expects a slower U.S. economic recovery near term as coronavirus cases rise and policymakers fail to approve a follow-up stimulus package to support businesses and workers struggling amid the pandemic.
While the economy is holding up fairly well and remains on a positive trajectory, consumer savings have dwindled without another round of emergency support from Washington, noted Ben Goetsch, senior investment strategist at City National Rochdale, the bank's investment advisory organization.
The team has tempered its outlook for fourth-quarter economic growth after a strong third quarter and doesn't expect U.S. gross domestic product to return to pre-pandemic levels until at least the end of 2021.
The investment leaders also downplayed the significance of the November election outcome for economic and market growth, while noting that potential changes in tax policy should prompt high-net-worth individuals to consider strategies to preserve their assets.
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"We find ourselves in late October and the coronavirus situation is very much still with us," Goetsch said during the team's Oct. 21 market update, calling the status of the virus, vaccine development and stimulus legislation key factors for the economy and financial markets.
"The outbreak is continuing to progress" with its course difficult to predict, he said. "U.S. data has turned in the wrong direction."
Medical researchers should deliver trial results for at least one vaccine candidate in the next two weeks, which could help provide a clearer picture, Goetsch noted. “That is a very critical portion of the expectations for the market and the economy in general," he said.
Any approved vaccine, however, is unlikely to reach the general population before late in the first quarter of 2021, he said, citing CNR's research. “We're going to be living with the virus for at least the next several months" and even that may be an optimistic timeline, he said.
U.S. cases and hospitalizations are rising while fatalities have stayed flat so far, he said, citing data from the COVID Tracking Project and the Institute for Health Metrics and Evaluation.
"It's not encouraging that we're continuing to see positive numbers," Goetsch said.
The U.S. fatality rate should climb slightly in the coming four weeks, he added, citing COVID-19 Forecast Hub projections.
"This outbreak is going to cause uncertainty at least through the end of the year," Goetsch said.
The coronavirus situation in Europe is more acute, with fatalities starting to increase and new infections about double the 50,000 to 60,000 confirmed U.S. cases daily, he said, citing European Centre for Disease Prevention and Control data.
Europe's economy has started to feel the effects of new outbreak restrictions that governments there are imposing, according to Goetsch.
“We continue to believe that the U.S. is better positioned than Europe," he said.
City National Rochdale Chief Investment Officer Tom Galvin noted that the U.S. business outlook and consumer sentiment have improved.
The United States may not see more relief from a stimulus package before Election Day, Galvin said, but it's "really, really important" for the economy and businesses — especially brick-and-mortar retailers — that policymakers approve one before the holiday season.
Stimulus checks and unemployment benefits that Washington approved earlier in the pandemic bolstered the economy and consumers' willingness to spend. Any stimulus legislation should extend mortgage forbearance and similar protections to avoid evictions that could weigh on individuals and the economy for months or quarters, Galvin said.
City National Rochdale now expects fourth-quarter GDP growth of 2 percent to 6 percent - compared with the team's earlier 7 percent to 12 percent forecast - given the lack of a stimulus agreement so far.
Full-year 2020 GDP, jolted by the pandemic in the first half, is likely to slip by 3.8 percent to 5 percent, according to City National's team, which forecasts 3.5 percent to 5.5 percent growth in 2021.
The recovery is "going to take time," possibly until early 2022 to reach pre-pandemic GDP growth levels, Galvin said.
City National's investment leaders noted that stock prices remain high while interest rates on investment-grade bonds are likely to remain low for a while, reinforcing the team's focus on high-dividend U.S. stocks with attractive valuations and high-yield bonds that can provide income to investors.
Rachael Crane, City National Rochdale portfolio manager, noted that the team has lowered its long-term market forecasts based on these conditions and suggested investors consider adjusting their risk tolerances to achieve their financial goals.
High-dividend stock prices may be more attractive relative to growth stocks and historical patterns, she said, citing various market data sources. These stocks have provided consistent income over time despite short-term price fluctuations.
Crane cited various market data sources in demonstrating how U.S. and emerging-market non-investment-grade bonds continue to provide attractive yields compared with investment-grade corporate bonds.
“In this low-interest environment, for clients looking for consistent income, this is an opportunity," she said.
While the high-yield bond market has seen defaults, most occurred in industries vulnerable to the pandemic or in already troubled companies, she suggested, citing data from JPMorgan.
That's why active management relying on strong research is important in building a portfolio, Crane added.
Meanwhile, the outcome of the 2020 election may result in significant tax policy changes affecting wealthy individuals and families, but City National Rochdale leaders said the coronavirus progression, emergency stimulus legislation, consumer sentiment and Federal Reserve monetary policy will have greater impact on the economy and financial markets.
The election is unlikely to change the team's high-level economic outlook, Goetsch told investors. And Galvin said that elections rarely alter the course of global economies.
“The pace of economic growth is unlikely to meaningfully change because of the election outcome," Galvin said.
Polls show Democratic presidential candidate Joe Biden more likely to win the Electoral College. The polls also indicate that many Senate races are too close to call, with Democrats possibly enjoying a modest edge, Galvin said, citing data from RealClearPolitics and 270towin.
Federal Reserve data suggests that any particular party's control of government has limited effects on economic growth, he noted. The S&P 500 has shown historically strong returns under any political party control scenario, he said, citing multiple data sources.
The election outcome could lead to policy changes affecting various industries, with Democratic control potentially a negative for the technology, financial and energy sectors, Galvin said.
But the election outcome is unlikely to significantly affect corporate profits overall, and even changes in the capital gains tax rate haven't affected S&P 500 returns historically, he said.
Jeffay Chang, City National Bank trust advisor, noted that Biden's proposals to raise capital gains taxes and increase the tax rate on incomes over $400,000 have prompted clients to explore strategies to take advantage of current laws and preserve their assets.
Among these moves, wealthy individuals and families are considering accelerating their charitable donations in 2020 to take advantage of pandemic-relief legislation that allows taxpayers to deduct contributions in amounts up to 100 percent of adjusted gross income.
Such deductions are usually limited to 60 percent of income and could be further limited in a Biden administration, he noted, adding that the 2020 provision applies only to cash donations made to public charities.
“If clients are thinking of making a large gift, now may be the time to do it," Chang said. Though, before taking action, investors should consult with their tax advisor beforehand.
Clients might also consider diversifying concentrated portfolios now to take advantage of the current capital gains rates, or accelerating recognition of capital gains, he said.
For 2021 and beyond, Chang suggested wealthy individuals consider gifting income-producing assets to children subject to lower income tax rates, setting up charitable trusts or donor advised funds or reducing their ordinary income.
On the other hand, Chang cautioned that investors not rush to shift strategies based on changes that might not happen.
These are moves to consider for those already focused on repositioning their portfolios, transferring wealth or establishing charitable foundations, he said.
In this election season and always, City National Bank and its investment advisory organization, City National Rochdale, remain committed to delivering objective, non-partisan market analysis and investment guidance, with the goal of helping our clients make informed financial decisions.
In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals today to ask questions and receive help with your wealth planning needs.
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City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the October 21, 2020 presentation, “Economic and health well being need stimulus and vaccine," is reprinted by permission from City National Rochdale.
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