Although gradual economic recovery should endure, U.S. consumer sentiment and equity markets will remain sensitive to setbacks until the country gets a handle on the coronavirus pandemic, according to City National Bank's investment team.
Given the surge in new cases this summer and the resulting pause in several states' reopening processes, the portfolio managers recently tempered their forecast for U.S. gross domestic product growth in the second half of this year.
The team expects a pause - not a reversal, however - in economic recovery, which leads them to continue to anticipate a strong rebound.
“We still do not see any signs that this gradual recovery has reversed course. We still see better economic data week over week or at least flat data, so far," said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization.
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The country needs a national plan and widespread compliance with health and safety protocols to gain control of coronavirus spread, as developed European and Asian nations have done, and no such plan is in sight, D'Alessandro said.
“The consumer is not going to get back to normal, nor do we think the equity markets are out of this vulnerable stage until we see the country develop a plan to get out of this coronavirus crisis," he added.
A mix of positive and negative news developments are shaping City National Rochdale's outlook and investment strategies.
On the positive side, the team expects lawmakers to approve another $1.5 trillion in economic stimulus to support small businesses and individuals, as emergency programs enacted earlier in the pandemic expire, D'Alessandro said.
The package likely won't be enough longer term, though, and more aid will be required, he continued.
On the negative end, the pause in reopening is generating more unemployment and small business bankruptcies.
Small businesses that experienced strong rebounds in early-opening states saw declines again in July, as coronavirus surged in those places, D'Alessandro said, citing data from Opportunity Insights and Womply.
In addition, unemployment remains historically high, with more than 30 million Americans collecting unemployment benefits, including gig workers sidelined by the pandemic, he noted, citing Bloomberg data.
The housing market has recovered significantly, essentially reaching pre-pandemic levels, D'Alessandro said, again referencing Bloomberg data. He attributed the housing recovery to historically low interest rates, economic support from emergency government programs and consumer sentiment.
Credit- and debit-card data from Opportunity Insights and Affinity indicate the rebound in consumer spending hit a plateau in July, as coronavirus cases surged, D'Alessandro said.
He cited data from the same sources showing major shifts in consumer spending during the pandemic, including drops in travel, entertainment, dining and transportation and increases in grocery demand.
Bloomberg data also showed that air travel, which had been trending higher in May and June after a severe drop, leveled off in July, D'Alessandro said. He expects it to pick up again in coming weeks.
The wave of new COVID-19 cases and hospitalizations in the U.S. South and West appears to have peaked, but the lethal and highly contagious disease is starting to spread in more states. So far, the country doesn't have a plan to control it, D'Alessandro said, citing data from covid19-projections.com.
While the Centers for Disease Control and Prevention has said schools should open this fall, this goal will be difficult to achieve, D'Alessandro added.
Studies indicate hospitalizations could decline to a new low in October, if the public followed the key coronavirus safety practices — mask wearing and social distancing, widespread testing, contact tracing and isolation of those testing positive — he added.
Fatalities, a lagging indicator, should reach a new peak in August, followed by a slow decline, D'Alessandro said, again citing covid19-projections.com data.
Given the unusual economic conditions, very low yields in investment-grade bonds and full valuations in equity markets, Rochdale investment leaders have adjusted portfolios and sought alternatives to help investors achieve healthy returns and income.
David Abella, managing director and senior portfolio manager, noted that the team considers high-dividend stocks appealing based on the potential for attractive yields and real income growth.
Eighty to 90 percent of firms have maintained their dividends — most cuts this year came from pandemic-affected companies — and Rochdale has sold stocks that the portfolio managers considered vulnerable to dividend cuts.
Value and high-dividend stocks have traded at a large gap to growth stocks, and high-dividend equities have traditionally performed well as the economy emerges from recession.
Rochdale believes they will do so again and is investing in companies that should help investors achieve similar returns, Abella said, citing Bloomberg data.
Chief Investment Officer Tom Galvin, citing FactSet data, said the top five tech companies — Alphabet, Amazon, Apple, Facebook, and Microsoft — were up 29 percent this year through July 24, while high-dividend stocks were off 19 percent and the Standard & Poor's 500 Index was up only 1 percent. Without those top five companies, which have benefited from demand for stay-at-home solutions during the pandemic, the S&P 500 would have been down 5 percent, he said.
The drop in high-dividend stock prices "creates an excellent opportunity," Galvin said.
While Rochdale is more aggressively buying high-dividend stocks, the team also is carefully choosing U.S. large-cap core growth stocks, which may be more suitable for investors with a higher appetite for risk, he said.
The team likes companies benefiting from the economic outlook and crisis: digital revolution theme companies, such as software companies; business continuity services; cloud-based services; and retailers with strong e-commerce presence, for example.
They also like home improvement and certain healthcare innovators that provide equipment or support to hospitals and to those companies developing tests or that may eventually manufacture vaccines, Galvin said.
D'Alessandro said the financial markets have substantially priced in victory for Democratic candidate Joe Biden in the U.S. presidential election in November but have not yet assumed a power change in Congress.
Meanwhile, on the fixed-income side, City National Rochdale is looking to high-yield bonds to help provide steady income and cash flow even with short-term price volatility, said Elizabeth Dooley, managing director and senior portfolio manager.
These bonds can provide a reliable income stream for older and moderate to moderately conservative investors as low interest rates in investment-grade debt have made it harder for them to find reliable income, she said.
Non-investment-grade yields remain favorable, with U.S. and emerging market high-yield bonds particularly appealing, said Dooley, citing Bloomberg data.
“We're looking to buy low in investments that we believe have a potential to recover in value" while providing consistent cash flow, she said.
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.
Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.
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 Dow Jones US Select Dividend Index includes a selection of stocks based almost entirely on dividend yield and dividend history. Stocks are also required to have an annual average daily dollar trading volume of more than $1.5 million. These criteria help to ensure that the index represents the most widely traded of the markets highest-yielding stocks.
The Bloomberg Barclays U.S. Corporate High Yield Index covers the U.S.-dollar denominated, non-investment grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.
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 ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.
The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
The S&P/LSTA (Loan Syndications and Trading Association) U.S. Leveraged Loan 100 Index measures the performance of 100 large loan facilities meeting specific inclusion criteria. The index is modified market value-weighted and is fully rebalanced semi-annually. In addition, the index is reviewed weekly to reflect pay-downs and ensure that it continually maintains 100 loan facilities.
The Bloomberg Barclays US Intermediate Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market whose maturity ranges between 1 to 9.9999 years. It includes USD denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
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.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
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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 July 29, 2020 presentation, “Attempting to Interpret Conflicting Covid and Economic News," is reprinted by permission from City National Rochdale.
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