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July 03, 2020

Progressing Through Uncertainty

The U.S. economic recovery could pause for several weeks as coronavirus cases surge in a number of states, although the reopening of business and social activity will continue, City National Bank's investment team told investors.

To achieve a lasting economic recovery during the lethal pandemic, consumers will need to trust in government and its ability to contain the virus, as individual behavior is key to determining economic conditions, said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization.

“It's really a very consequential pause," not only in the six states where cases are spiking but across the country, with all 48 continental states likely to slow their reopening in response, he said on the team's weekly market update Wednesday.

He attributed the recent surge to uncoordinated state reopening protocols.

"The reopening depends upon the behavior of consumers, the behavior of consumers relies on the trust of government to be able to contain and control the spread," D'Alessandro said. "We expect a pause to remain in place for some time."

States confront new spike in cases

States affected by the recent spike in coronavirus cases, D'Alessandro said, are starting to acknowledge scientific evidence that clearly shows why officials need to take certain steps to control transmission, including:

  • Requiring face masks.

  • Providing persistent and extensive testing.

  • Tracing the contacts of individuals who test positive.

  • Adopting a "zero-tolerance" policy in mandating quarantine for those with the illness.

"That is the ideal approach," but states are adopting their own versions of it to varying degrees, D'Alessandro said.

How could this impact the economy?

The City National team expects state officials to take this segmented approach rather than returning to the blanket shelter-in-place stance that has rocked the economy, D'Alessandro said.

Tom Galvin, City National Rochdale's chief investment officer, reiterated the team's view that the recovery will proceed in fits and starts, shaped by a mix of good and bad news.

And Ben Goetsch, Rochdale's senior analyst for investment solutions, said new corporate decisions to close stores or delay reopening - combined with state reopening delays - could cause a few bumps in recovery.

Federal support

The portfolio managers expect the government to support the economy by providing another $1 trillion to $1.5 trillion in stimulus by the end of this month, with more aid likely to follow to help businesses and individuals bridge financial hardship through the rest of this year.

Galvin noted that consumer spending, bolstered by stimulus programs provided so far, has recovered quickly. Opportunity Insights data showed spending reaching a level in mid-June just 10 percent below the pre-crisis levels.

Consumer spending has recovered

Signs of recovery

The housing market appears to be strengthening, Galvin said, citing Bloomberg data. He presented Homebase statistics showing that hiring of hourly workers made a rapid partial recovery before slowing recently.

Government figures released Thursday show non-farm payroll employment rose by 4.8 million in June.

City National maintains its view that gross domestic product won't fully recover before early 2022, Galvin said.

The investment managers' economic indicators continue to signal a gradual economic recovery leading to normal activity.

Economic and Financial Indicators

The U.S. stock market

The U.S. stock market, now fully valued based on anticipated 2021 earnings, could undergo a correction in the near term if coronavirus infection rates continue to rise and companies and states delay reopening, Galvin told investors.

He assumes there will be no new statewide or national lockdowns, which could hamper the solid economic growth that City National expects in the third quarter, although regional shutdowns are possible.

Galvin expects a "curvey, zig-zag return," and said the slowdown should be short-lived if people take precautions and realize that wearing masks makes a difference.

Signs of progress, state-by-state

Despite the recent case surge, the team cited several encouraging trends and projections.

While Texas, Arizona, Oklahoma, South Carolina, Arkansas and Georgia have seen a rapid increase in hospitalizations in the past four weeks, and 13 other states have seen moderate rises, most states have experienced negligible or declining coronavirus hospitalizations, Goetsch noted, citing late-June data from The COVID Tracking Project.

"That's very encouraging, it's indicating that progress is being made," and that the upticks are isolated and not spreading across the United States, Goetsch said.

Hospitlization issues limited to a subset of states

He noted that the "ubiquitous wearing of masks" and compliance are far better in Japan, which saw negligible coronavirus fatalities without a significant lockdown even as U.S. cases surged in April., according to Bloomberg data.

"That's very encouraging because it means we can take some lessons from Japan," Goetsch said, adding that Europen countries had learned many of these lessons and managed to largely get their outbreaks under control.

Japan suggests masks could be a key

The Institute for Health Metrics and Evaluation estimates that Texas, Florida and California would see an immediate, significant drop in coronavirus fatalities if 95 percent of the population immediately started wearing masks when going out in public, he noted.

"You can potentially keep huge portions of the economy open," Goetsch said.

Power of targeted measures: masks can have a major impact

Texas, which started reopening in early May, was doing relatively well until it allowed bars to open right before the Memorial Day weekend, Goetsch said.

Bar owners couldn't enforce capacity constraints and proper precautions weren't taken, which led to "super-spreading events," he explained, citing The COVID Tracking Project. "That's one of the main causes of what's happening in Texas."

Texas: targeted measures needed to stem upward trend

Building your portfolio

City National's investment leaders expect interest rates, now near zero, to remain very low for the next one to three years and have adopted an asset allocation approach to help clients reach their goals and realize healthy returns and income in these challenging times.

While a balanced portfolio comprising 60 percent stocks and 40 percent bonds traditionally has provided reliable returns, corporate bonds aren't expected to generate their historical income and returns in coming years, given their recent aggregate 2 percent yield, Galvin said, citing data from Bloomberg.

Balanced portfolio has historically provided reliable returns

Given current conditions, a more optimal portfolio for investors with long time horizons might reflect 30 percent corporate bonds and 70 percent stocks — including high-dividend equities — and high-yield bonds, Galvin told investors.

The team favors U.S. and Asian emerging-market stocks over other equities, and also seeks high-income alternative investments, he noted.

Traditional 60-40 portfolio may not be optimal any more

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 US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

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.

The MSCI Europe Index is a free-float weighted equity index measuring the performance of Europe Developed Markets. It was developed with a base value of 100 as of December 31, 1998. 

The MSCI Emerging Markets Asia Index is a free-float weighted equity index measuring the performance of Asia Emerging Markets. It was developed with a base value of 100 as of December 31, 1987.

The MSCI Emerging Markets Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The Russell 3000 Index is composed of 3000 large U.S. companies, as determined by market capitalization. This portfolio of securities represents approximately 98% of the investable U.S. equity market.  

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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 1, 2020 presentation, “Progressing Through Uncertainty," 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.