Even as coronavirus cases spike in several states, City National Bank's investment team remains confident that the U.S. economy will experience a strong recovery in the second half of this year.
The investment team expects the third quarter to be particularly robust, while portfolio managers noted several areas of economic strengthening already, including rebounding freight traffic, manufacturing activity, and home and auto sales.
Keep reading for your weekly market update.
While pandemic trends in a few states present cause for concern, U.S. coronavirus hospitalizations and fatalities overall stand at manageable levels as states progress in lifting shutdown orders and reopening for business, said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization.
The lethal virus is surging in states — notably Texas, Arizona and Florida —that reopened without adopting the safety policies and protocols that were scientifically recommended, and their leaders now seem prepared to consider those measures, D'Alessandro said Wednesday during the bank's weekly market update.
Texas Gov. Greg Abbott on Thursday decided to pause his economic reopening plans amid an increase in COVID-19 cases and hospitalizations in that state.
Trends in Arizona, where hospitalizations are climbing closer to available bed capacity, present particular cause for concern, D'Alessandro said, citing data from the COVID Tracking Project and the Institute for Health Metrics and Evaluation.
The state, he added, is likely to start implementing safety protocols.
Ben Goetsch, senior analyst, investment solutions at City National Rochdale, said the Arizona hospitalization trend line suggests exponential growth, and “that can be troubling because it will cause hospital capacity to be eaten up very quickly."
It's important to keep an eye on Arizona and Texas for the next few weeks, he said.
While hospitalizations in Texas and Arizona have accelerated, hospitalizations are flat or declining in most other states, D'Alessandro said, citing COVID Tracking Project data.
A return to a broad shelter-in-place lockdown nationwide would be economically unsustainable, D'Alessandro said, but he noted that recent scientific research from top academic institutions indicate targeted approaches can curb coronavirus spread, hospitalizations and economic costs.
Some states shifted quickly to minimal virus controls, allowing large gatherings and imposing few restrictions.
"And what we've seen is that doesn't work," he said, adding that states need a gradual phasing that includes testing, tracing, isolating and face masks.
D'Alessandro cited Massachusetts Institute of Technology research suggesting that such targeted measures can achieve the same mortality rate as total lockdown with a fraction of the economic impact.
Meanwhile, the City National Rochdale team expects to see a multi-phase economic recovery, with the first stage a strong V-shaped rebound lasting at least through the next two quarters, according to D'Alessandro, who predicted that data will show the recession ended in May or June.
“The road to recovery is going to be an interesting one, fits and starts - bad news, good news - but right now the news is good," said Tom Galvin, City National Rochdale's chief investment officer.
Rail freight demand is rising, a good signal that business is picking up, while housing, auto sales and manufacturing activity also appear to be rebounding, he said, citing data from Bloomberg, the National Association of Homebuilders survey and regional Federal Reserve manufacturing surveys.
"The wheels of commerce are re-engaged," Galvin said.
Hiring has improved nicely overall, Galvin said, although he also presented Homebase data that shows how hiring of hourly workers has slowed lately after a partial recovery.
The City National Rochdale team expressed concern that an end to government stimulus programs, including extra unemployment payments scheduled to stop soon, will threaten the recovery.
“What's going to happen when the government stops mailing checks out to people?" Galvin asked, citing Bloomberg data indicating that government financial support drove an 11 percent increase in personal income in May, a figure that would have fallen 7 percent if not for that support.
“The government stimulus has been very important," he said.
The team expects the government to provide another $1 trillion to $2 trillion to support unemployed workers and struggling businesses, according to D'Alessandro.
As for investments, the team believes the Standard & Poor's 500 index is fully valued at a 20 times price-to-earnings ratio for 2021 — not an excessive valuation but fully valued.
"This coronavirus situation, it's very bad - it's tragic - but the market is looking at this as a natural disaster, putting it in a box, looking past it and pricing it into stocks," D'Alessandro said.
Analysts' consensus estimates show S&P 500 earnings per share dropping 20 percent this year and rebounding by 27 percent in 2021, Galvin noted, adding that City National Rochdale sees earnings climbing by 30 percent next year.
A market correction is overdue, Galvin said, adding that City National expects a “good, healthy correction in coming weeks" and looks forward to the opportunity to put to work the cash buffer the team has been setting aside by buying attractive stocks.
The portfolio managers, sticking to their investing discipline, favor large-cap U.S. stocks over non-U.S. developed markets, and Asia over non-Asia emerging market equities.
They continue to see select high-dividend stocks and high-yield bonds as attractive options to meet investors' income needs, among other alternatives, given low yields on investment-grade bonds and moderate anticipated returns for balanced portfolios.
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 June 24, 2020 presentation, “What We Have Learned," is reprinted by permission from City National Rochdale.
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