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October 23, 2020

The Need for Stimulus and A Vaccine: Weekly Market Update

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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Battling the Pandemic

"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.

Graph showing Vaccines in Final Stretch -- still a 2021 solution

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.

Graph showing national cases, hospitalizations, and fatalities

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.

A Global Perspective

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.

graph showing Europe's surge has accelerated

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.

Seeking Relief

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.

graph showing recovery underway but full recovery will take time

The Stock Market

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.

Graph showing investing in a low interest rate envrionment

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.

graph showing high dividend stocks relatively attractive

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.

Graph Showing Despite Recovery, We Believe Non-Investment Grade Yields Are Currently Favorable

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.

graph showing defaults concentrated in a few areas of the market

Election Season: What to Expect

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.

map and graph showing tracking election 2020 - Biden's still got the edge

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.

graph showing how much impact do elections typically have

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.

graph showing policy impact on the economy

Best Next Steps

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.

graph showing capital gains - charitable deduction - comparison

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.

cni graph showing what strategies are beign discussed

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.

You are encouraged to keep up-to-date with the latest economic perspectives and shifting global markets during the pandemic by signing up for City National Bank's newsletters here. Delivered biweekly, straight to your inbox.

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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. 

The S&P 500 Growth Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed betweenthe value & growth indices. Prior to 12/19/2005 this index represented the S&P 500/Barra Growth Index.

The Dow Jones Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally consists of 100 dividend-paying stocks that have five-year non-negative Dividend Growth, five-year Dividend Payout Ratio of 60% or less, and three-month average daily trading volume of at least 200,000 shares.

The Bloomberg Barclays U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. 

Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity. 

ICE BofAML High Yield US Emerging Markets Corporate Plus Index tracks the performance of US dollar denominated below investment grade emerging markets corporate debt publicly issued in the US domestic or eurobond market.

The Palmer Square CLO Debt Index is designed to reflect the investable universe of US CLO mezzanine original rated A, BBB and BB debt issued after Jan 1, 2011.

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This presentation is for general information and education only. City National makes no representations or warranties in respect of this presentation and is not responsible for the accuracy, completeness or content of information contained in this presentation. City National is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained in or from the site. The information in this presentation should not be used to obtain credit or for any other commercial purpose nor should it be construed as tax, accounting, regulatory or legal advice. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations and you should seek professional advice from your advisor. Nothing in this presentation should be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the viewer's specific investment objectives. Any financial instrument discussed in this presentation may not be suitable for the viewer. Each viewer must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this presentation and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results.

The material contains forward-looking statements regarding intent, beliefs, or current expectations which are used for informational purposes only. Readers are cautioned that such forward-looking statements are not a guarantee of future performance, involve risks and uncertainties, and actual results may differ materially from those statements as a result of various factors. The views expressed are also subject to change based on market and other conditions. Furthermore, the opinions and information presented do not involve the rendering of personalized investment, financial, legal, or tax advice. 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. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results.

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.

City National (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this article and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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