The coronavirus pandemic has thrust the economy into an unprecedented shutdown that has come with extraordinary consequences, namely sharp revenue declines for businesses of all sizes and sudden joblessness for millions.
While the downturn and associated stock market decline are severe, the investment team at City National Bank continues to expect the economic crisis to end in roughly two months, followed by a strong and steady rebound later this year.
“We definitely do not think that this coronavirus will cause a year-long recession like the 2008 financial crisis did," said Garrett D'Alessandro, CEO at City National Rochdale, the bank's investment advisory subsidiary. At the same time, he said, “It's a little bit premature to have high confidence that the bear market is over."
At his team's weekly market update for clients on March 30, D'Alessandro welcomed the government's massive emergency efforts to sustain individuals, businesses and the economy and emphasized the importance of a careful, long-term investment approach with regular check-ins to make sure portfolios are positioned to meet investors' goals.
The economy will be “very dynamic" over the next couple of months, D'Alessandro said. “This crisis has upended every conventional economic thinking that I could imagine."
City National Rochdale expects initial U.S. jobless claims, which set a record at more than 3.2 million last week, to exceed 10 million over the next three weeks. For some perspective, that's more than the 8.6 million reached at the peak of the 2008-2009 financial crisis and recession, based on Bloomberg data.
U.S. workers may lose more than $60 billion in wages per month during the shutdown, with low-wage hourly employees significantly affected, D'Alessandro noted. He cited data from Homebase and the U.S. Bureau of Labor Statistics indicating that the number of employees going to work at small- and medium-sized businesses dropped by 59 percent from March 1 to March 25.
“We have a lot of economic hardship going on and we have compassion and empathy for all those who are affected, frankly, through no fault of their own," D'Alessandro said.
The shutdown has placed a major burden particularly on small businesses, half of which couldn't operate longer than three months if the virus persists, according to a Goldman Sachs Investment Research survey.
In addition, most major industries should see significant year-over-year revenue declines, led by the transportation sector, which may see sales drop by nearly 90 percent, according to data from Womply.
“This is a shutdown, which is different than a recession, which is a slowdown over many months," D'Alessandro said. Several sudden shocks, starting with the global coronavirus outbreak in late February, followed by the international oil price war, set the U.S. and global economy and markets reeling, he explained.
U.S. policymakers have responded with unparalleled efforts to introduce stability for individuals and industries alike, including sweeping actions by the Federal Reserve, followed by Congress' recent passage of the $2 trillion CARES Act aimed at providing financial relief to dislocated workers, consumers, small businesses, major industries, the healthcare system, state and local governments and the Fed.
“This is a very good foundational program," D'Alessandro said. City National Rochdale expects this stimulus package to provide enough to support consumers, the unemployed, strategic industries and the Fed. Congress may need to do more for small business and healthcare, and provide even greater aid to state and local governments, he said.
While not wanting to take an overly optimistic outlook as the outbreak spreads across the United States, the City National Rochdale team sees positive indicators for the economy and the potential outbreak trajectory, including the government stimulus programs and improved coronavirus testing activity.
City National Rochdale expects U.S. gross domestic product to sink by 15 percent in the second quarter of this year and to start to recover in the third quarter, leaving the figure down 1.9 percent for 2020. In keeping with that forecast, the firm also anticipates drastic declines in corporate Q2 earnings.
So what do these gyrations, uncertainties and moving parts mean for investors?
City National Rochdale remains focused on high-quality companies in good sectors, including consumer staples, healthcare and technology. The team continues to adjust client portfolios in response to market volatility – trimming stocks most exposed to the downturn and raising more cash – while maintaining the long-term view.
The team believes client portfolios to be in a good position for challenging times.
Many portfolios contain a mix of 60 percent stocks and 40 percent bonds, D'Alessandro noted, explaining that all recent volatility in client holdings have come from the equities side. Pointing to a sample 60-40 portfolio, he noted a 14.4 percent decline from Feb. 20 to March 27, with stocks falling 24.5 percent and bonds relatively flat.
“It is troubling to see a decline in the value of a portfolio," D'Alessandro said. “That causes stress and anxiety in anyone - professional or individual investor." He noted, however, that the same portfolio has returned 198 percent over 10 years.
While portfolio risk management is a top priority now, the investment team continues to look for opportunities for higher income generation as they align portfolios to clients' goals.
D'Alessandro explained the firm's “behavioral" approach to meeting long-term goals, which involves allocating portfolio assets based on near-term, intermediate and long-term needs, i.e., bonds for cash needs in the next three years, a 50-50 stock and bond split for medium-term goals, and equities for needs a decade or more away.
Even if the recession lasts longer than expected, investment managers could tap bond holdings for cash and not have to sell depressed stocks, D'Alessandro said.
He likened City National Rochdale's professionals to pilots flying toward long-term destinations, checking in along the way to make sure they're on the right course. Managers, D'Alessandro said, are ready to speak with clients about their goals and how best to align their portfolios to achieve them.
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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 30, 2020 presentation, “Plane and Pilot: Navigating the COVID-19 News and Volatile Investment Markets," is reprinted by permission from City National Rochdale.
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