City National Bank's investment leaders have raised their U.S. economic growth forecast for the third quarter and full year, citing strong demand both from consumers and from businesses recovering from the coronavirus pandemic shutdown.
“The two are going to help provide a solid second half of the year for us," said Tom Galvin, chief investment officer for City National Rochdale, the bank's investment advisory organization.
City National now expects U.S. gross domestic product to grow by 15 percent to 25 percent in the third quarter, with a bias toward the upper end of that range, compared to the previous outlook for 10 percent to 12 percent growth, Galvin said during a September 9 presentation.
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After a 32 percent second-quarter decline amid the coronavirus lockdown, GDP should register a 4 percent to 5.3 percent decline for the full year 2020, followed by 3.5 percent to 5.5 percent growth in 2021, Galvin said.
Consumers, who account for roughly two-thirds of U.S. economic activity, are driving growth in the second half of this year, while companies rebuilding inventories or expanding are contributing as well, he said.
Though "we see gradual continued recovery," City National Rochdale CEO Garrett D'Alessandro said, the team is "increasingly disappointed" with federal policymakers' failure to approve a robust stimulus package to keep supporting businesses and jobless Americans struggling with the ongoing pandemic.
A recovering manufacturing sector and booming existing home sales signal a generally improving economic backdrop, the Rochdale leaders said.
Consumer net worth has hit a record $123 trillion, D'Alessandro noted. "That is the source of future spending across the U.S."
Nonetheless, they cited areas of weakness, risk and uncertainty arising from the public health crisis, including 13.6 million unemployed workers, continued troubles for the airline and travel industries and conflicting fatality projections for the rest of 2020.
While employment is gaining ground overall, more of the layoffs forced by the pandemic lockdown are turning from temporary into permanent job losses as businesses close, cut investments or file for bankruptcy.
“The number of permanent job losses continues to climb" tempering the improving employment picture, Galvin said, citing the Bureau of Labor Statistics.
Roughly half of the 22.1 million jobs lost during the pandemic have returned, although prolonged shutdowns have slowed gains in July and August, he said, also citing BLS information. Galvin noted that census worker hiring boosted employment statistics last month.
Many businesses damaged in the lockdown will shut their doors permanently, Galvin said. “That's why we don't see unemployment back to pre-COVID levels for many years," he said.
The overwhelming majority of shuttered businesses have no defined plan for reopening, according to D'Alessandro.
D'Alessandro cited mixed news in the fight against coronavirus, including a “stunningly negative" projection from a leading forecasting service, the Institute for Health Metrics and Evaluation, that fatalities from the disease could more than double from current levels to exceed 400,000 by year end, potentially spurred by a winter spike in influenza.
But another leading service, covid19-projections.com, forecasts declining fatalities, he noted.
“No one knows what will happen," D'Alessandro said, adding that a case spike could create hospital capacity problems.
Meanwhile, the Rochdale CEO cited covidtracking.com data showing coronavirus cases, hospitalizations and fatalities declining nationally.
More than half of U.S. states are reporting positive coronavirus test rates under 7.5 percent, putting them in the “green zone" necessary for business reopenings, while 13 recently fell into the “red zone" with positive rates at or exceeding 10 percent, D'Alessandro said, again citing covidtracking.com.
Coronavirus vaccine Phase III trial results should be available later this year, with possible government approvals coming before year end, he said, citing multiple sources. A vaccine's true safety won't be clear until millions of people have received it, however, D'Alessandro noted.
Rochdale analysts also are keeping an eye on the 2020 election outlook and implications for investor portfolios and strategies from potential policy changes.
D'Alessandro cited recent polls indicating a lead for Democratic presidential candidate Joe Biden and a tightening race for control of the U.S. Senate.
“Covid-19 continues to be the most important factor driving macro positioning" in client holdings, with elections contributing to volatility, said Lindsey Cook, senior portfolio manager.
Stocks remain highly valued and investors should consider alternative strategies for better returns, D'Alessandro said.
Given high stock prices and low interest rates, City National Rochdale has been emphasizing carefully selected large-cap and high-dividend U.S. stocks, emerging market Asia equities and “opportunistic" assets including high-yield bonds, emerging market debt, collateralized loan obligations and U.S. bank loans.
Galvin noted that Rochdale has been “waving the yellow flag" on emerging speculative tech stocks, which he said may be starting a long overdue correction after explosive performance this year. City National, he said, steers clear of these exorbitantly valued stocks and remains focused on companies with strong fundamentals and reasonable valuations.
Active asset management is key to helping clients reach their goals, with asset allocation the most important decision, followed by individual securities, said Rachael Crane, portfolio manager.
It's also vital, she said, to manage for risk and tax consequences and minimize investors' behavioral biases that can lower returns.
Active management allows investors to adapt to a changing economic environment, Crane noted.
“What we're recommending today may be different than what we're recommending a year from now or six months from now," she said.
Rochdale has enhanced investor returns over the past five years with its portfolio weighting decisions, she noted, citing data from Factset.
In this election season and always, City National Bank and its investment advisory organization, City National Rochdale, remain committed to delivering objective, non-partisan market analysis and investment guidance, with the goal of helping our clients make informed financial decisions.
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.
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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 September 9, 2020 presentation, “Economic and COVID progress vaccines vs. flu season," is reprinted by permission from City National Rochdale.
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