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April 23, 2021

U.S. Recovery is Underway

The U.S. economy is poised for years of expansion, with strong growth likely through 2022 as consumer spending, manufacturing and jobs bounce back post-pandemic, according to City National Bank investment leaders.

The investment team continues to expect the U.S. and emerging-market Asia to outperform Europe and noted that key economic indicators signal a well-established U.S. recovery is underway. Moreover, they said, significant government infrastructure spending, although likely funded through tax increases, should bolster the economy long-term.

"The U.S. economy is well-positioned and on track for a multiyear expansion, and we expect strong growth this year and in 2022," said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization. The remarks were made during the team's April 21 market update.

The team expects earnings for S&P 500 companies to show strong growth as well in 2021 and 2022.

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Jobs are returning and should accelerate as the pandemic recedes, and manufacturing is showing "some of the fastest rates of growth that we've seen in the U.S. economy in decades," D'Alessandro said.

Surveys also indicate the service industry is undergoing its fastest growth in decades.

Paul Single, City National Rochdale managing director and senior portfolio manager, noted that 17 of 20 key economic gauges the group monitors —consumer sentiment, personal disposable income, housing, business outlook and corporate profit growth among them — measure positive.

“We're recovering from an economy and a recession like no others," Single said, noting that the pandemic forced people to leave work, and now they can come back safely. While jobs are recovering much more rapidly than in previous downturns, unemployment remains high and needs improvement, he said, citing Bureau of Labor Statistics data.

Pandemic Trends

Improving U.S. pandemic trends play a key role in the rebound.

"The U.S. data for COVID are continuing to improve and turn downward," unlike in other regions around the world, D'Alessandro said. While daily COVID-19 cases are rising elsewhere, they're flattening overall in the U.S., with fatalities trending lower, he said, citing Bloomberg data.

The U.S. has rolled out vaccines much quicker than the European Union and emerging markets, he noted, citing Our World in Data.

Consumer Outlook

Significant stimulus relief from the federal government during the pandemic “has left the American consumer chock full of cash right now," Single said. With the economy reopening, he added, "they'll be able to spend it." Strong consumer spending in the second quarter "will propel the economy in a way we haven't seen in 40 years," he added.

Retail sales have spiked in recent months, lifted by pent-up demand, the latest round of government stimulus checks, easing pandemic restrictions and the enormous savings consumers amassed during the crisis, Single said, citing data from the Bureau of Economic Analysis and the U.S. Chamber of Commerce. "We expect to see really, really strong consumption in the second and third quarters," he said.

City National Rochdale expects the recovery to gain steam throughout 2021, with gross domestic product surpassing pre-pandemic levels in the current quarter and historical trends next year, based on Federal Reserve projections and BEA data.

Growth will probably play out even stronger than the Fed's projection, which came before the Biden administration unveiled infrastructure spending proposals that should help add jobs and fuel the economy, according to Single.

The American Jobs Plan

The investment team expects the 10-year, $2.3 trillion infrastructure spending proposal, dubbed the "American Jobs Plan," to strengthen the economy by adding more people to the workforce, even though higher corporate taxes amounting to $1.8 trillion likely will be used to pay for the program.

"There are many good things that can come from a well-designed and structured infrastructure plan," D"Alessandro said, noting that the country's investment in infrastructure has declined over the past 60 years.

Under the proposal, which calls for investment in transportation, domestic workforce development, expanded broadband access, electric grid modernization and other areas, federal infrastructure spending would nearly double from its 2020 level to reach 3 percent of GDP — its highest level since the 1960s — D'Alessandro said, citing BEA and White House data.

Experts generally agree that U.S. infrastructure sorely needs repair and rebuilding. Failing infrastructure is expected to cost the American family an average $3,300 a year by 2039, according to data from the American Society of Civil Engineers, which gives the country a "C minus" infrastructure grade.

Given the long-term economic benefit, D'Alessandro said, "we are very much in favor of infrastructure."

Less is known so far about Biden's "American Families Plan," D'Alessandro noted. That proposal, to be presented in a speech to Congress next week, is expected to call for at least $1 trillion in spending on child care, universal pre-K, community college, Medicare at age 60 and various tax credits aimed at bolstering middle class Americans.

Tax Increases

Higher corporate taxes are likely to pay for the infrastructure plan, while increased taxes on wealthy individuals are expected to fund the proposed educational, savings and social programs, D'Alessandro said.

Historically, higher individual taxes on the wealthy don't, in and of themselves, significantly hurt the economy, and infrastructure spending's positive economic benefits are likely to outweigh any negative drag from higher corporate taxes, he said.

Biden's stimulus proposals should enable years of growth, according to Tom Galvin, City National Rochdale chief investment officer.

"We believe the positives outweigh the negatives," he said. Positives include increased hiring, a real GDP boost, higher wages and better U.S. strategic positioning. Potential drawbacks, in addition to tax increases, include short-term stock volatility, pressure on multinationals, and slowed short-term growth if higher taxes come before new spending, he said.

Higher taxes won't necessarily impede higher stock prices, as economic activity is key to higher growth, Galvin said, citing FactSet and U.S. Treasury Department data indicating the stock market historically has performed well under various tax increases.

Stock prices ultimately are driven by corporate profits, and City National expects the impacts to corporate earnings to be relatively modest, Galvin said.

The investment team has factored a 23 percent corporate tax rate into its projections and believes higher revenues will partly offset higher taxes, he said.

Meanwhile, the team is not particularly concerned about inflation for now. While inflation should jump in the next few months as businesses reopen and consumers open their wallets, City National Rochdale expects it to moderate toward 2 percent longer term. "Higher inflation shouldn't derail the stock market" and could even nominally add to GDP growth and profits, Galvin said.

Your Portfolio

City National investment managers continue to encourage individuals to reassess traditional portfolio allocations consisting of 60 percent U.S. equities and 40 percent investment-grade bonds, given low interest rates, high equity valuations and the likelihood of tax increases.

Stocks have seen "record appreciation," and while investors can expect reasonable returns from here, they're unlikely to be as high as they've been recently, D'Alessandro said.

The team suggests investors talk to their advisors about optimizing their portfolios with high-quality stocks and high-yield debt to help achieve long-term financial goals.

“What we have done historically that has worked well is much less likely" to meet client goals now, said Rachael Crane, City National Rochdale portfolio manager, who cited Bloomberg data in noting that investment-grade bonds have been underperforming inflation.

The team, which continues to favor U.S. and emerging-market Asia stocks, has been increasing portfolio exposure to economically sensitive large, mid-cap and small companies to help maintain growth, and suggests investors consider shifting from investment-grade bonds to opportunistic credit, including high-yield bonds.

With higher capital gains taxes possibly on the way, now may be the right time for investors to realize some gains and talk to their financial advisors and portfolio managers about tax mitigation strategies, Crane suggested.

In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Get in touch with a City National advisor today to ask questions and receive help with your wealth planning needs.

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

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

The Bloomberg Barclays U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. 

Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity. 

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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. 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. 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 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.

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the April 21, 2021 presentation, "Assessing the Post-Pandemic Landscape" 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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