Mid-year investor calculations

July 17, 2020

The Mid-Year Outlook for Investors 2020

The economic and health uncertainties surrounding the coronavirus pandemic may lead investors to make instinctive moves or rely on conventional rules of thumb. But neither may support their long-term financial goals, City National Bank's investment team cautioned this week.

Traditional asset allocation strategies are unlikely to achieve good results in the next three to five years, the bank's investment leaders said during their mid-year outlook presentation.

They suggested that investors consider alternative approaches that incorporate high-dividend stocks and "opportunistic" fixed-income assets, such as high-yield bonds, leveraged loans and others.

Keep reading to learn more about your options during these uncertain times.

Investors, create a safety net

"We're dealing with a very complex and uncertain time" given the pandemic, massive job losses, the upcoming U.S. election and a substantial federal deficit, said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization.

Such an environment is likely to amplify investor biases and behaviors that position portfolios for less than optimal performance, he said, and investors may seek the safety of investment-grade bonds, despite historically low yields that are expected to remain in place for some time.

He also said investors might consider strategies that keep them on track to achieve long-term goals.

Market volatility associated with alternative strategies doesn't mean clients will risk losing their principal, he noted.

Meanwhile, the U.S. remains in "learning mode"

The team cited several developments contributing to the unusual economic environment, including the United States' struggle to control the coronavirus outbreak.

Asian nations “have quite frankly done a good job and are well in control of the spread," D'Alessandro said, citing Bloomberg data showing China, Japan, Hong Kong and South Korea barely registering new daily cases compared with roughly 200 cases a day per million people in the United States as of late June.

While those countries, seasoned by past infectious disease outbreaks, have implemented the practices and protocols that help contain the virus, he noted, the United States remains in "learning mode."

Asia shows us how to manage the outbreak

Leading medical institutions have published evidence from other countries showing that four moderate policies — mandatory mask use, extensive testing and contact tracing, strict quarantine for those testing positive and social distancing protocols — can help contain coronavirus spread, D'Alessandro said, noting that enforcement is necessary absent an effective vaccine or herd immunity.

"We in the United States don't want to have these impositions placed on us and that's why we're struggling," he added.

Could politics change everything?

City National's investment team also is monitoring the electoral outlook.

S&P 500 stocks historically post the highest returns when Democrats control the White House and Senate and Republicans run the House, D'Alessandro noted, citing Factset and congressional data.

Election 2020: Market reacts to balance of power

Independent political polls show trends favoring the presumptive Democratic presidential candidate, former vice president Joe Biden, he said, citing RealClearPolitics and 270towin data.

However, D'Alessandro added, it's likely too early for polls to provide clarity, and investors shouldn't make financial decisions based on them now.

Presidential election polling

Financial forecasts

City National Rochdale Chief Investment Officer Tom Galvin reported that the 20 economic and financial indicators the team monitors have improved in recent weeks and offer a balanced outlook for the next three to six months.

Prospects for another economic stimulus package from Washington present the most important indicator now, and - while new government support is likely - it's not guaranteed given political discourse in the capital, he said.

"The uncertainty continues to remain high in that regard," he said.

Economic and Financial Indicators

Rochdale's professionals also consider GDP forecasts unclear for the rest of 2020 and 2021. The team expects GDP to shrink by 4.2 percent to 6.5 percent for the full year 2020 and to rebound to a range of 3.5 percent to 5.5 percent in 2021, Galvin said.

Equities are likely to remain volatile in the second half of this year, with corporate earnings reports growing more important given the fully valued stock market, he said.

While development of a coronavirus vaccine could be a game changer for the stock market, the team doesn't expect one to reach the public until 2021.

Rochdale expects S&P 500 earnings-to-share to drop by 30 percent this year and to gain 30 percent in 2021.

CNR S-P 500 EPS Forecast

Your options, as they stand

The investment leaders remain selective in their equity choices, focusing on U.S. large-cap and dividend-producing stocks and Asian emerging market securities, Galvin said. While uncertainty is high in economic and earnings forecasts, the Rochdale team expects a recovery driven by rebounding sales and margins.

They favor reasonably valued, high-quality companies with sustainable business models focused on the nesting consumer, digital revolution and healthcare innovation, as well as industrial leaders and domestic growth firms, Galvin said.

City National is overweight in telecommunication services, e-commerce, software and services, as well as healthcare equipment and pharmaceutical biotech. While its modest cash buffer curbed performance a bit year-to-date, the team's underweight position in industries hit by the pandemic — energy, hotels and cruise lines, airlines and restaurants — has enhanced performance, Galvin said.

Rochdale had a 16 percent cash position in late March, selectively deploying cash and whittling down the position to 11 percent by the end of June. Cash now stands at 10 percent, an appropriate level given the economy's broad uncertainties, Galvin said.

Active management-quality stocks in key themes

The firm favors high-dividend stocks to help investors achieve their income needs with investment-grade bond yields at historic lows.

Dividend stocks tend to offer attractive income, a favorable 15 percent to 20 percent tax rate, future income growth and capital appreciation as the economy stabilizes and grows, said David Abella, City National Rochdale senior portfolio manager for high dividend and income equities.

The team targets a 3 percent to 8 percent high-dividend growth "sweet spot" as the economy recovers, he told investors, noting that they hone in on companies likely to maintain their dividends even in stressful times. The portfolio managers look for firms with strong balance sheets, access to capital, solid cash flow, low debt, and dividends lower than EPS, Abella said.

Terrence Loughran, director and senior portfolio manager, noted that the Fed has "thrown everything, including the kitchen sink," at the economy during the crisis with its swift and powerful response.

It took the Fed 10 weeks this year to inject the level of liquidity that it pumped into the economy over six years following the previous global financial crisis, he noted, citing Fed data.

The Fed Balance Sheet

All in all

With high-yield corporate and municipal bond spreads widening, these assets present a good value, despite lower mid-year returns compared with investment-grade bonds, Loughran said, citing Bloomberg data. High-yield bonds appear positioned to perform as the crisis subsides, he said.

Yield - Investment Grade vs High Yield

Other fixed-income opportunistic investments, including U.S. collateralized loan obligations and leveraged loans and emerging market corporate bonds, also offer potentially attractive income and returns, he said, citing Bloomberg and Palmer Square data.

Yields on other varieties of opportunistic fixed income

Loughran urged investors to consider the monopoly power of municipal bonds and noted there are more than 50,000 U.S. municipal bond issuers that can't be painted with one broad brush.

“These are strong entities that will survive what we are going through," he said.

He also recommended an intermediate-long, tax-exempt approach to municipal bonds, a 5- to 20-year strategy for long-term investors that balances risk and returns.

Monopoly power of municipalities

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.

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

Consumer Price Index For All Urban Consumers Index (CPI-U) is a measure that examines the changes in the price of a basket of goods and services purchased by urban consumers. 

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. 

MSCI AC World Index ND is a market capitalization weighted index that includes companies in developed and emerging markets throughout the world. The index is computed using the net return, which withholds applicable taxes for non-resident investors. 

MSCI Japan Index ND is a market capitalization weighted index designed to reflect the large and mid cap segments of the Japanese equity market. The index is computed using the net return, which withholds applicable taxes for non-resident investors. 

MSCI AC World Index ex US ND is a market capitalization weighted index that includes companies in developed and emerging markets throughout the world excluding the United States. The index is computed using the net return, which withholds applicable taxes for non-resident investors. 

MSCI EAFE NR Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% free float-adjusted market capitalization in each 21 countries. Net returns in USD.

MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets. 

Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. 

S&P/LSTA U.S. Leveraged Loan 100 Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market. The index consists of 100 loan facilities drawn from a larger benchmark – the S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index (LLI). 

Dividend & Income Blended Index is a custom blended benchmark composed of 50% Dow Jones US Select Dividend Index / 10% Alerian MLP Index / 15% MSCI US REIT Index GR / 25% BofA ML Core Fixed Rate Preferred Securities Index. 

The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.

The Nikkei 225 stock average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

The MSCI Emerging Markets Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets countries.

The Dow Jones US Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally consists of 100 dividend-paying stocks that have five-year non-negative Dividend Growth, five-year Dividend Payout Ratio of 60% or less, and three-month averaged daily trading volume of at least 200,000 shares. 

Bloomberg Barclays Capital Municipal Bond Index is a broad market performance benchmark for the tax-exempt bond market. The bonds included in this index must have a minimum credit rating of at least Baa. 

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. 

Bloomberg Barclays High Yield Municipal Bond Index (barhiym) is an unmanaged index considered representative of non-investment-grade bonds. 

ICE BofAML High Yield US Emerging Markets Corporate Plus Index tracks the performance of US dollar denominated below investment grade emerging markets corporate debt publicly issued in the US domestic or eurobond market.

The Palmer Square CLO Debt Index is designed to reflect the investable universe of US CLO mezzanine original rated A, BBB and BB debt issued after Jan 1, 2011.

The Federal Open Market Committee, a committee within the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations. This Federal Reserve committee makes key decisions about interest rates and the growth of the United States money supply.

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 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 July 15, 2020 presentation, “CNR Mid-Year Outlook," 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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