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.
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.
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.
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:
In situations like these, Peron said, working with an advisor can provide important benefits and help reduce risk through:
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.
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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 March 23, 2020 presentation, “Sharp Decline Ahead, Strong Rebound to Follow," is reprinted by permission from City National Rochdale.
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