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April 29, 2022

U.S. Economy Remains Strong Despite Uncertainty

City National Bank investment leaders this week noted unprecedented uncertainties facing the economy and financial markets — namely high inflation, rising interest rates and geopolitical crises — while maintaining their confidence in U.S. economic strength.

Managers at City National Rochdale, the bank's investment advisory organization, have broadened the potential scenarios they're considering in weighing portfolio decisions, given increased risks to their outlook for multiyear U.S. economic expansion.

At the same time, they expect continued domestic growth this year and into the first half of 2023 and predict a U.S. recession is unlikely in the short term. Inflation — which peaked at an overheated 8.5% in March — should moderate in the second half and into 2023, while still remaining too high, according to the team and Bureau of Labor Statistics data.

"We are all aware of the unprecedented number of uncertainties facing our economy and the financial markets," City National Rochdale CEO Garrett D'Alessandro said during a market update Wednesday, expressing confidence in the team's ability to navigate precarious waters. “The U.S. economy is strong right now on many levels."

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Is Another Recession Going to Happen?

Potential headwinds could lead to slower growth or a mild downturn, but the Rochdale team doesn't consider a U.S. recession likely before mid-2023. Investment leaders expect in the next couple of months to have a better look into next year's second half and whether a downturn is likely.

Healthy corporate and consumer balance sheets continue to support economic growth and should mitigate the effects of rising interest rates, improving odds for avoiding a recession. Nearly 80% of U.S. households enjoy solid balance sheets, D'Alessandro said, citing Goldman Sachs data.

“That's a good measure on why we're not yet concerned about the risk for recession for the next six months," he said.

Pressures from inflation, high commodity prices and aggressive Federal Reserve tightening have moderated economic and financial market indicators for the next six to nine months, but signals generally remain positive, indicating solid fundamentals.

Economic Risks From Ukraine & China's COVID Struggles

The Rochdale team expects U.S. economic strength to offset inflation headwinds but is monitoring the war in Ukraine and China's restrictive COVID-19 response with heightened concern.

They note that Chinese shipping rates are down from last year's peak while the Ukraine crisis has raised commodity prices and concerns that Russia will weaponize fuel and and food exports.

“Over the next six to nine months we continue to see the economy on a solid footing," City National Rochdale Chief Investment Officer Tom Galvin said. Among other factors, Rochdale leaders expect strong U.S. job creation and wage gains to counter inflation pressures this year.

The team sees significant pent-up demand for leisure experiences, such as travel, restaurants and sporting events, supporting City National Rochdale's equities positions, Galvin said, citing bookings data from travel and credit card companies. “There are a lot of reasons to be optimistic," he added.

Chart - Financial Indicators

Possible Portfolio Adjustments

Depending on the course of Fed interest rate hikes and resulting consumer behavior, Rochdale managers may decide to reduce their overweight position in equities.

“We have to be flexible and we have to have the ability to think through the what-ifs that could occur," D'Alessandro said. "We will in the near future make a determination about how much equities we have in our client portfolios."

At this point, the team favors high-quality U.S. equities and attractively valued fixed-income municipal bonds, remains underweight in European stocks given recession and stagnation risks, and is reviewing its emerging-markets Asia exposure in light of China's stringent zero-COVID policy.

"The U.S. is the best-positioned economy," D'Alessandro said, explaining that the war in Ukraine poses greater risks to Europe's economy while China's current COVID response pressures growth in Asia. These two crises are prolonging high inflation, he said.

GDP & Corporate Profit Growth in 2022

The City National Rochdale team forecasts 2.75% to 3.75% gross domestic product growth this year, slower than the unusually strong 5.7% achieved in 2021 as the country emerged from pandemic shutdowns. They expect corporate profits to grow by 5% to 11% and for inflation to moderate to roughly 5.5% by year-end 2022.

The "virtuous cycle of corporate profits" should continue, and the wealth effect from housing will likely make a positive influence on consumer sentiment and spending, Galvin said.

Table - Economic Growth

D'Alessandro pointed to several indicators of U.S. economic strength, including housing starts, unemployment claims and indexes measuring consumer confidence and business activity.

Chart - Economic Indicators

Inflation & Supply Chain Issues Persist

Supply chain disruptions and pandemic-related economic distortions have fueled inflation however, with the Ukraine war exacerbating price pressures, D'Alessandro said. Energy, food, used cars and housing have intensified inflation, he said, citing Consumer Price Index data from Bloomberg. The Federal Reserve, which targets a 2% inflation rate, aims to "whittle away at the forces of inflation," he said.

Chart - Consumer Price Index

In the second half of this year, Fed rate hikes may bring down "flexible inflation" items like energy, vehicles, food and travel lodging, while "sticky inflation" items, including housing, medical care, education and dining out, may take longer to come down, D'Alessandro said, citing Fed data. Interest rates, while increasing, remain low compared with historic rates, he noted.

Chart - Flexible Inflation vs .Sicky Inflation

Rising wages also are driving inflation as businesses continue to face labor shortages, according to the Rochdale CEO. By raising interest rates, the Fed aims to create enough unemployment to slow wage increases but faces the risk of sparking too much joblessness. "That's a very difficult balancing act," he noted.

Consumer and business expectations about inflation can make a difference, according to D'Alessandro, who explained that high-inflation expectations can make the Fed's job more difficult, prompting more aggressive tightening.

Rochdale's investment leaders are reviewing various paths the economy could take in 2023. With normal growth, which is the more likely scenario, GDP could reach 2% to 3% and corporate profits could rise 5% to 10%, Galvin said, using FactSet data.

Table - Economic Scenarios

CNR Investment Focus Remains on U.S. Stocks

Looking at investments, Rochdale leaders continue to forecast more modest returns and greater volatility across asset classes longer term. For now, they prefer high-quality, reasonably valued U.S. stocks, including dividend-producing equities, and municipal bonds.

Dividend stocks are attractive now, providing steady income, appealing yields, potential for equity capital appreciation and lower volatility than the broader stock market, according to David Shapiro, City National Rochdale senior portfolio manager and senior equity analyst.

City National Rochdale's equity income portfolio generates a 3.6% yield, he said, citing FactSet data, and valuations remain attractive. The team expects high-dividend stocks to generate near-term total returns of 5% to 7% and has positioned the portfolio to perform amid rising interest rates, slower economic growth and high inflation.

Rochdale has high equities income exposure to regional banks; life, property and casualty insurers; utilities and consumer staples, Shapiro said. The team likes "great American companies" with enduring brands, competitive advantages and the ability to handle today's volatile environment, he added.

Chart - CNR Equity Income Largest Sector Exposures

Risks & Opportunities for Municipal Bonds

Michael Taila, City National Rochdale managing director and co-director, fixed income, noted that bond markets have had a challenging year so far, with municipal bonds (munis) being no exception. A historic muni selloff has created attractive buying opportunities, he said.

Benchmark yields are at their highest levels in years and some muni yields are outpacing Treasurys, he said, citing Bloomberg data. While munis — both investment grade and high income — are experiencing a historic drawdown, Taila said that the credit environment remains resilient and strong returns typically follow such selloffs.

Munis remain a safe-haven asset class with a low correlation to the rest of the market and they present excellent diversification across economic cycles, he added. The key risks are downgrades, not defaults, according to Taila. He predicted that certain sectors should continue to improve post-pandemic.

"It's really important to stay engaged in this market," Taila said, noting that more volatility is likely.

Table - Volatility Creates Opportunity

Rochdale managers are unlikely to make big changes to portfolios if growth is normal, said Lindsey Cook, senior portfolio manager.

If the economy slows, Rochdale may lean in on its high-quality equity income strategy while removing exposure to growth stocks and harvesting tax losses to offset gains elsewhere, she said. In a mild recession, the team might increase its investment-grade bond allocation as interest rates increase, Cook added.

The team continues to pursue alternative investments, such as direct lending, reinsurance, capital leasing and structured credit, to achieve higher returns, income and diversification, albeit with potentially greater volatility.

Review Your Portfolio With Your Wealth Planners Today

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.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or  sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

The material contains forward-looking statements regarding intent, beliefs, or current expectations which are used for informational purposes only. Readers are  cautioned that such forward-looking statements are not a guarantee of future performance, involve risks and uncertainties, and actual results may differ  materially from those statements as a result of various factors. The views expressed are also subject to change based on market and other conditions. Furthermore, the opinions and information presented do not involve the rendering of personalized investment, financial, legal, or tax advice.

Investments in below-investment-grade debt securities which are usually called “high-yield” or “junk bonds,” are typically in weaker financial health and such  securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher  rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve  heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial  and operational risks, and less developed legal and accounting systems than developed markets.

Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or  completeness cannot be guaranteed

Adjustments to portfolio strategies are based on guidelines set forth by City National Rochdale’s Asset Allocation Committee. Individual client allocations among  strategies, asset classes, portfolio weightings may be higher or lower given differences in portfolio holdings, client imposed restrictions, and/or the customized  strategy implemented by each client’s portfolio manager. These differences may have a material impact on individual client’s performance returns.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment  advisor and a wholly-owned subsidiary of City National Bank.

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

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee  of future results.

This material is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment advisor and a wholly-owned subsidiary of City National Bank.

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

S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies  in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.

Muni Bond: A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures, including the construction  of highways, bridges or schools. These bonds can be thought of as loans that investors make to local governments.

Bloomberg Barclays U.S. Corporate High Yield Bond Index: measures the USD denominated, high-yield, fixed-rate corporate bond market.

Dow Jones Select Dividend Index: The Dow Jones U.S. Select Dividend Index looks to target 100 dividend-paying stocks screened for factors that  include the dividend growth rate, the dividend payout ratio and the trading volume. The components are then weighted by the dividend yield.

The Intercontinental Exchange (ICE): The Intercontinental Exchange (ICE) is an American company that owns and operates financial and commodity

marketplaces and exchanges.

The Bloomberg Aggregate Bond Index: "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-  traded funds (ETFs) as a benchmark to measure their relative performance.

U.S. Treasury Yield Curve: refers to a line chart that depicts the yields of short-term Treasury bills compared to the yields of long-term Treasury notes and bonds.

Consumer Price Index (CPI): is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food,  and medical care.

Bloomberg Barclays US Aggregate Bond Index: The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders  and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

MSCI Emerging Asia PE: The MSCI Emerging Markets Index is a selection of stocks that is designed to track the financial performance of key companies in fast-

growing nations. It is one of a number of indexes created by MSCI Inc., formerly Morgan Stanley Capital International.

Global Equity Markets: a global market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets.

The Commodity Research Bureau (CRB) Index acts as a representative indicator of today's global commodity markets. It measures the aggregated price

direction of various commodity sectors.

An investment grade is a rating that signifies that a municipal or corporate bond presents a relatively low risk of default.

The Bloomberg Barclays Municipal High Yield (HY) Index is a flagship measure of US municipal tax -exempt high yield bond market.

This presentation is for general information and education only. City National makes no representations or warranties in respect of this presentation and is not  responsible for the accuracy, completeness or content of information contained in this presentation. City National is not responsible for, and expressly disclaims  all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained in or from the site. The information in this  presentation should not be used to obtain credit or for any other commercial purpose nor should it be construed as tax, accounting, regulatory or legal advice.  Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations and you should seek professional advice from your  advisor. Nothing in this presentation should 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 viewer's specific investment objectives. Any financial instrument discussed in this presentation may not be  suitable for the viewer. Each viewer 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 (and its clients or associated persons) may, at  times, engage in transactions in a manner inconsistent with this presentation 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.

The expected returns shown do not include fees for trading costs (e.g., commissions) or any fees charged by your financial advisor. Please speak to your financial  advisor for a complete understanding of all fees.

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the April 27, 2022 presentation, "April 2022 Economic Outlook and Investment Strategy" 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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