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March 26, 2020

What's Ahead for Investors in 2020?

There's no denying this is an extraordinary moment for the U.S. economy and markets, as the coronavirus pandemic and the sweeping business shutdowns designed to fight it pitch the country into recession.

The stock market's 29 percent slide over just a few trading days has been unprecedented, as is the surge in U.S. unemployment claims anticipated in the next few weeks. It's no wonder the investor “fear index" has reached an historic high.

Even amid this extreme volatility, however, City National Bank's investment professionals expect a recovery later this year and see significant opportunity for disciplined investors with a long time horizon.

Their core forecast is that the market decline, while sharp, should be brief, followed by a strong and steady rebound – if the country contains the virus in the coming weeks. They see no evidence now to indicate the economy is poised for an extended depression.

“We're in the fastest, most intense decline in our history, so we understand that it's reason for consternation," said Garrett D'Alessandro, CEO at City National Rochdale, an investment advisory subsidiary of City National Bank. However, he added, “we don't want a behavioral response that's out of proportion."

D'Alessandro and Matt Peron, City National Rochdale's chief investment officer, offered their latest views in a March 23 presentation, noting that their team has been repositioning portfolios for resilience now and strength once the market recovers.

“We're in the middle of a bear market," D'Alessandro said. The City National Rochdale team currently expects the downturn to last one to two months as U.S. coronavirus cases escalate, after which the economy, earnings and equities should start to recover. They'll be looking for attractive investment opportunities over the next two months.

Five shocks have hit the markets in recent weeks, including the coronavirus outbreak, the global oil price war, plummeting U.S. Treasury yields and computer-programmed trading that drove half the equities decline.

5 Simultaneous Shocks

While this combination may be unusual, they believe credit markets, which have deteriorated significantly over the past week, are reflecting worst-case scenarios across major industries rather than likely outcomes.

Distressed loan prices, for example, anticipate that 100 percent of airlines and conglomerates, more than 80 percent of oil and gas companies and 70 percent of hotels will go out of business. City National Rochdale disagrees, although the firm does forecast sharp year-over-year revenue declines for several industries.

“The actual data doesn't justify that level of negativity," D'Alessandro said. “We're seeing this overreaction in the prices and we're ready in a couple of months - not now - to take advantage of that."

A look at historic trends and current activity abroad may provide some perspective.

Past disease outbreaks brought market declines followed by strong intermediate-term rebounds. Looking at the S&P 500 averages over five previous outbreaks, the S&P 500 declined 9 percent and the downturn lasted 62 days, with stocks rebounding 23 percent over 12 months and 35.4 percent over 24 months.

Previous outbreaks have demonstrated near-term market declines followed by a strong rebound in the intermediate term

China, hit earliest by coronavirus, has started to recover, D'Alessandro said, citing reports from the National Health Commission of China, which noted that the country had no new cases last week and is set to lift the lockdown on the province where the disease first arose in January. Consumer spending there is returning to normal, according to Bloomberg.

The United States will likely take longer than China to control the virus, but medical experts from the International Monetary Fund anticipate two to four months, not six months or longer, D'Alessandro said.

He also noted that bear markets usually recoup 50 percent of their losses in four to 10 months, according to Capital Economics.

First though, the U.S. must move past this severe downturn, and containing the virus is key, D'Alessandro said.

“If you don't have a shelter-in-place policy, you could have an excessive number of people who become sick, who would not be able to receive the appropriate level of hospital treatment or care," D'Alessandro said. Social distancing can keep the medical caseload manageable and reduce fatalities, avoiding a sharp spike in cases that would overwhelm hospitals.

Serious Public Health Issue

In the meantime, companies and workers, especially small businesses and low-income employees, will experience severe impacts as social distancing shutters shops, effectively cutting off revenue and paychecks.

“We expect a rapid increase in unemployment claims over the next few weeks to a level we haven't seen in recent memory if ever," Peron said.

Here are several other key points from the presentation:

  • With a one-month U.S. economic shutdown, we expect GDP to shrink by 7 percent in Q2 and by 2 percent for the full year. If the shutdown lasts two months, GDP could sink by 15 percent in Q2 and 9 percent for the full year. With either of those scenarios, Rochdale's investment leadership team anticipates a recovery starting in the third quarter.

  • S&P 500 company earnings will likely be dismal in the second quarter this year, but the market has already priced this into equities, Peron said. The market will react positively as soon as it sees signs that a recovery will happen six months ahead, he added.

  • While the Federal Reserve has been pulling out all the stops through lower interest rates and other moves to provide liquidity to markets and support lending, recovery also requires Congress to approve policies to support troubled industries and laid-off workers and to provide fiscal stimulus.

  • Owning equities requires a long time horizon; City National Rochdale likes to set client goals over five- to 10-year periods. Looking at S&P 500 market returns from 1990 to 2019, stocks have experienced positive returns over 10-year periods 94 percent of the time.

In situations like these, Peron said, working with an advisor can provide important benefits and help reduce risk through:

  • Strategic Asset Allocation

  • Goal-Based Planning

  • Quality Company Selection

Successful investing involves the ability to interpret the news flow and understand the long-term outlook. D'Alessandro and Peron emphasized in their presentation that they are available to help clients translate events in this stressful time.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Standard & Poor's 500 Index is a widely recognized unmanaged index including a representative sample of 500 leading companies in leading sectors of the U.S. economy and is not available for purchase. Although the Standard & Poor's 500 Index focuses on the large-cap segment of the market, with approximately 80% coverage of U.S. equities, it is also considered a proxy for the total market.

This article is for general information and education only. It is not to 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 reader's specific investment objectives. Any financial instrument discussed in this article may not be suitable for the reader. Each reader 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 provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the March 23, 2020 presentation, “Sharp Decline Ahead, Strong Rebound to Follow," 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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