Two investors walking cautiously optimistically

April 15, 2020

Cautious Optimism on COVID-19 Recovery Process

The U.S. economy and financial markets likely face months of ongoing turmoil as the country struggles to contain the coronavirus outbreak, although several important new developments suggest the effort is progressing, City National Bank's investment team told clients this week.

During their April 13 market update on the pandemic, the bank's investment leaders expressed confidence that the economy will gradually recover, but cautioned that last week's strong stock market rally appeared premature, as the nation must achieve numerous milestones in the coronavirus fight before that happens.

“We're still remaining cautious," said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization. “We would be surprised if we don't have some further decline ahead after this rally."

With conditions constantly changing, each week seems to require material adjustments to gross domestic product, earnings and unemployment forecasts, he noted. Economic fundamentals remain uncertain, and the country is likely months away from returning to near-normal conditions, D'Alessandro said.

"We think this is a multi-month bottoming process," with another market pullback likely, said Tom Galvin, City National Rochdale's chief investment officer.

Nonetheless, recent developments and historical trends suggest the economy and markets will experience a steady recovery once the pandemic recedes and businesses reopen, according to Rochdale's investment leadership team, which includes Charles Luke, who oversees taxable bond portfolios.

While coronavirus has brought about unprecedented unemployment in the country, the group expects jobs to fully recover two years after the crisis — less than half the time it takes following most recessions.

Recessions since 1990

D'Alessandro, citing information from New York Governor Andrew Cuomo and Bloomberg, outlined key events driving last week's 12 percent gain in the Standard & Poor's 500 Index, including government actions to bolster the battered economy and a significant decline in coronavirus hospitalizations in hard-hit New York.

Major Developments This Week

Several other U.S. hot spots are expected to peak soon too, and the country may reach its coronavirus hospitalization apex sooner than expected, he said. New cases appear to be peaking in the United States and globally, he said, citing Bloomberg data.

New Cases Peaking Globally

D'Alessandro noted a “very positive adjustment" in the estimates for U.S. coronavirus fatalities, from an original 2 million without social distancing measures, to a revised range of 100,000 to 240,000 with social distancing, to the most recent 60,000 forecast, also based on Bloomberg data.

"Sixty-thousand is a terrible reality," D'Alessandro said, but not nearly as severe as previously expected. It shows that social distancing is working, he said.

Beyond the apparent shifts in the outbreak trajectory, he noted extraordinary moves by policymakers to address the economic damage resulting from the business shutdowns and social-distancing measures put in place to slow the virus' spread.

The Federal Reserve last week announced plans to provide $2.3 trillion to support the economy through loans to businesses, including a Main Street lending program, and credit for households and state and local governments. D'Alessandro called the surprise move “stunningly positive, unprecedented in its relevance, its impact."

The $6 trillion total that the Fed is expected to pump into the economy this year dwarfs its support for the economy over several years following the 2008 financial crisis, Galvin noted. The City National investment team reaffirmed its view that Congress will need to provide support beyond the $2 trillion relief package it recently passed to support consumers, businesses and employees, and said the Fed must keep putting cash to work for the economy.

“We'll be keeping our eyes open on that going forward," Galvin told clients.

Significantly, policymakers are starting to consider strategies for eventually reopening cities, but the country must meet several important goals first.

While mortality trends seem to be improving and the government response signals positive movement , for instance, the country must ramp up disease testing and establish a framework for resuming business, D'Alessandro said.

Crisis Indicators Turning Green

To get back to normal, the nation requires better and more widespread testing, a scheme to identify and isolate people with coronavirus, a “passport" or certification system to allow healthy employees to return to work, and apps to enable disease tracking, he said. Testing must eventually be available even down to the level of retail chain stores, D'Alessandro said. Steps to curb the disease's spread, including securing protective gear for workers, is key, Galvin added.

Elements to get back to normal

D'Alessandro cited a McKinsey & Co. roadmap for restarting the economy, which requires the public health system to move through four phases from low preparedness amidst high virus spread to a near normal state, with improved health-system capacity and a halt to the highly contagious virus. That almost-normal phase could be months away, he said.

Framework for state-by-state reopening

Citing the same report, D'Alessandro said different industries will likely restart in stages,  with each of the four recovery phases potentially lasting weeks or months.

City National's team noted that GDP forecasts remain dynamic, with multiple financial firms now expecting a rebound starting in the third quarter of this year. That outlook, though, depends on the various steps needed to shore up the economy and control the coronavirus, Galvin noted.

“We do believe that the process is going to take time, it's going to be a multi-month corrective process," Galvin said. “We are expecting more turbulence so keep your seatbelts fastened. We have our eyes on where to go and what to do."

Consumers will take some time to feel comfortable going back to work and spending money again, possibly until the U.S. Food and Drug Administration approves a coronavirus treatment, Galvin said.

They will likely prioritize spending on the road to normalcy, with e-commerce, home entertainment and groceries important in the near-term, he said. Eventually, consumers will again embrace retail, restaurants and entertainment outside the home, while likely taking longer to regain interest in travel, luxury goods and cars , he added.

Consumers will prioritize spending as we normalize

The story is similar for businesses, which are concentrating now on services that facilitate working from home, such as cloud-based software and communications. In the medium-term, they'll likely focus on production and infrastructure, while business travel will remain a low priority for a while, Galvin suggested.

Meanwhile, opportunities to generate higher investment income have improved during the crisis, with fixed-income yields much higher now across the board, except for U.S. Treasuries. The team is interested in investment-grade corporate bonds, most high-yield U.S. bonds, U.S. senior secured loans and emerging-market high-yield bonds.

As first-quarter earnings season unfolds, the group will better be able to gauge how badly the coronavirus shutdown has hit corporations.

"We're not out of the woods yet," Galvin said, noting that investors are likely to see dividend cuts before the market and economy recover.

In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals to 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 April 13, 2020 presentation, “The Sun Rises in the West: Progressing to the Next Stage," is reprinted by permission from City National Rochdale.

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