business man wearing pandemic mask at desk

November 20, 2020

Vaccine Results and the Dependent Economy: Market Update

City National's remaining 2020 market updates will be published on Dec. 4 and 18. The investment series will continue in early 2021.

Surging coronavirus infection rates continue to pressure the U.S. economy, but promising results from two vaccine trials suggest a likely transition to post-pandemic normalcy by the middle of next year, City National Bank investment leaders said this week.

“There is negative data in the short term, but the market is forward looking. We're looking for a better year in 2021 as we start to transition to a normal economy that is partly driven by a new vaccine," said Ben Goetsch, senior investment strategist at City National Rochdale, the bank's investment advisory organization.

The economy and financial markets depend on vaccinations ending the pandemic, he told investors during a Nov. 18 discussion. Keep reading for your market update.

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The Vaccine and Political Promises

U.S. stocks have surged this month, lifted partially by late-phase clinical trial data announced by pharmaceutical giants Pfizer and Moderna. The trial results indicate that their coronavirus vaccine candidates are safe and more than 90 percent effective — which is a far greater efficacy than experts had anticipated.

“This is all very good news. It eliminates a very significant source of uncertainty for the markets," Goetsch said. “Now we have a little bit of a light at the end of the tunnel."

City National Rochdale Chief Investment Officer Tom Galvin called the results a "game changer," assuming no manufacturing or distribution hiccups occur.

Galvin also noted that vaccine effectiveness typically reaches approximately 60 percent: "This is truly a positive, unexpected event," he said.

COVID-19 vaccine distribution may start before year-end and expand broadly to the general public by spring, Goetsch said, noting that other pharmaceutical companies continue to work on vaccines that would contribute critically to the supply. Pfizer plans to soon seek emergency use authorization from the U.S. Food and Drug Administration and Moderna is likely to do the same, he said.

Half the population potentially could be vaccinated by the end of March, Goetsch said.

Vaccines expected available by Spring

Stocks and fixed-income investments rallied on the vaccine news, with equities reaching an all-time high, while other developments are driving financial markets as well, the team noted.

Corporate earnings reports suggest a better-than-expected recovery this year, according to Galvin, who cited an NDR forecast for 2021 profits to outpace 2019. 

Earnings next year are forecast to average about 10 percent higher than the previous all-time high, Goetsch noted.

stock market looks ahead

The market was pleased by what it considers the best outcome in the election — government control shared by Democrats and Republicans and, perhaps, a better approach to trade policy, Galvin said.

Split government tends to produce the best equity market returns, with taxes unlikely to rise significantly and drain economic activity, Galvin explained.

Despite the positive vaccine developments, individuals, businesses, hospitals and the economy continue to grapple with rising coronavirus infections, hospitalizations and fatalities.

The economic growth rate is likely to moderate in the next few months, although the outlook looks good for the second half of 2021 and beyond, Goetsch said.

Yet COVID Continues

U.S. hospitalizations have surpassed their previous peak, and the rise in cases is widespread, albeit happening faster in the Midwest, Goetsch said, citing data from The COVID Tracking Project and the Institute for Health Metrics and Evaluation.

national cases rise

The response appears to be "a patchwork of more targeted restrictions," with state and local officials focusing on businesses where the virus is most likely to spread, as well as public and private gatherings and "trying to avoid the broad-based lockdowns that caused so much economic devastation back in April," Goetsch said, citing University of Oxford data.

“For the next few months we're looking at a sort of muddle-through approach" with targeted restrictions slowing parts of the economy, he said.

targeted restrictions on activity

In Need of Stimulus

Economic gains are continuing, but jobs are expanding at a slower rate than a few months ago, Goetsch said. He predicted that unemployment will likely decline to 9 million from 11 million over the next year and hiring will pick up in the second half of 2021.

"We're on an upward trajectory," he said.

Washington gridlock over a pandemic economic stimulus package and uncertainty over its size has led to economic slowing, he said.

Galvin, citing Affinity Solutions and Opportunity Insights data, said that recent improvements in consumer spending had slowed in the short-term, hampered by the virus' spread, new local restrictions and colder weather. That slowing will likely continue in the coming weeks in the absence of a pandemic economic stimulus package, with some bump up during the holidays.

The slowing is likely to be temporary, with a pullback in the first quarter and consumer spending making continued progress throughout 2021, according to Galvin, who cited Bloomberg data.

consumer spending expected to improve

Holiday spending, on the other hand, correlates to net worth, which has been positive lately with the stock market rise and increasing housing prices, Galvin said. Personal income has held up so far, but more stimulus is needed as pandemic emergency relief measures — enhanced jobless benefits, loan forbearance and eviction stays — expire, Galvin said, citing Bloomberg data.

jobs vs stimulus

Building Your Portfolio

City National Rochdale analysts continue to expect low interest rates longer term and are maintaining their preference for U.S. and emerging market Asia equities, high-dividend U.S. stocks and high-yield taxable and municipal bonds. The team, which expects high-dividend stocks to perform better in 2021 than in 2020, remains underweight in investment-grade bonds because of low interest rates.

U.S. equities valuations are likely to remain high given strong earnings growth and low interest rates, Goetsch said.

The Rochdale team is starting to shift its focus from stocks that have benefited from the pandemic to those that benefit from a more normal economy, and has been buying large-cap and high-dividend stocks over the past few months in preparation, according to Goetsch and Galvin.

Galvin cited Starbucks, Transunion and Blackstone and said there will be more to come as Rochdale puts cash to work as they see opportunities.

The coronavirus situation is worse in Europe, leading to more severe restrictions so far that have hampered the economic recovery there, leaving the United States in a far better position, according to team members, who cited data from the European Centre for Disease Prevention and Control and Apple.


europe's surge has reached peak levels

Galvin said European hospital capacity as a percentage of population is lower, and its policy response has been "significantly worse" than in the United States, with funds from a 2 trillion euro package passed in July not yet distributed.

U.S. and emerging Asian markets continue to outperform other regions and remain well positioned, he said, citing multiple data sources.

emerging markets continue to outperform

Rochdale is "keeping our compass set on true North" long term, Galvin said. "We are confident we have the right approach."

Elizabeth Dooley, managing director and senior portfolio manager, emphasized the importance of asset allocation, which she called more important than stock selection in portfolio performance.

Rather than thinkingabout stocks and bonds, investors should consider "sources of return," she said. Rochdale, in building portfolios, looks at long-term themes and industry groups and then selects attractive companies with reasonable valuations, she said.

Market Opportunities

Attractive companies are high-quality firms with good earnings visibility, strong revenue streams and balance sheets, sustainable business models and the ability to adapt to changes in the broader environment, said Dooley. Rochdale likes multi-channel companies that benefit from both foot traffic and online consumers, rather than pure digital plays, she said.

It's become apparent in recent months that "human contact and interaction is really important," and Rochdale sees opportunity there, she said.

The team, which sees tech and healthcare companies driving long-term growth, is focused on the "evolving consumer," she said. Consumers went from pre-pandemic discretionary spending to a nesting mindset when they spent more on necessities and did so online more than previously.

Rochdale looked at companies like Walmart and Home Depot "that really stepped up their game," she said.

Now, said Dooley, "we look at this as a blend of the two as we return to normalcy and consumers have more opportunity to spend," with an increased focus on e-commerce and a return to in-person shopping.

Rochdale also sees the digital revolution creating opportunities across industries.

With a large and active aging U.S. population, the team is looking at innovative health companies offering, for example, equipment and telemedicine.

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.

You are encouraged to keep up-to-date with the latest economic perspectives and shifting global markets during the pandemic by signing up for City National Bank's newsletters here. Delivered biweekly, straight to your inbox.

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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 November 18, 2020 presentation, “Economic and health well being need stimulus and vaccine," is reprinted by permission from City National Rochdale.

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