The U.S. economy appears set for a multiyear expansion, starting with a strong recovery later in 2021 when widespread coronavirus vaccination is expected to subdue the pandemic, according to City National Bank investment leaders during the Rochdale team's 2021 outlook presentation on Jan. 27.
"We believe we can look at the road ahead with optimism and confidence," said Tom Galvin, chief investment officer for City National Rochdale, the bank's investment advisory organization. "Clarity and visibility have replaced fear, uncertainty and doubt."
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The team expressed confidence in the prospect that its investment strategy — focused on U.S. high-dividend and growth stocks, Asian emerging market equities, high-yield bonds and alternative assets — will outperform the market long-term.
While the recent COVID-19 resurgence likely means a weak economic start to the year, roughly two-thirds of the U.S. population is projected to be vaccinated by mid-year, which should allow a return to more normal activity, Galvin said.
Federal policymakers' economic response to the pandemic has been massive, timely and well-targeted, and the potential for more stimulus funding under the Democratic-controlled government has lifted growth prospects, he said.
Galvin noted that the country has avoided repeated widespread shutdowns and said thin Democratic majorities in Congress make significant policy shifts unlikely.
"The combination of these factors has bolstered our confidence in the outlook" for both the economy and companies, he said.
City National Rochdale has modestly raised its U.S. gross domestic product growth forecast for this year to a 4 to 6 percent range, driven largely by an estimated 20 to 30 percent expansion in corporate profits, Galvin said, citing data from the Bureau of Economic Analysis, Standard & Poor's and Bloomberg.
Conditions are in place for long-term economic expansion at an average of 3 percent growth a year, with GDP expected to return to pre-pandemic growth late in the third quarter, Galvin said, citing data from BEA and Blue Chip Economic Indicators.
It will likely be late 2023, however, before the economy fully returns to its upward potential, he said.
Given the Moderna and Pfizer vaccine roll-out now underway, most of the country should be inoculated by mid-May, with roughly 70 percent of the population immune by June and coronavirus infections expected to drop to nearly zero in summer, Galvin said, citing data from covid19-projections.com.
He noted areas of uncertainty, including new virus strains, difficulties in vaccine distribution and unknowns on the vaccine's long-term effectiveness.
“No one truly knows how long the benefits of the vaccine last once you get it," Galvin said.
The government's financial response to the pandemic has bolstered City National's outlook for consumers, businesses and the economy overall for the next six to nine months and has far exceeded the stimulus provided in 2009 through 2011 after the great financial crisis, Galvin said, citing data from Bloomberg and the Congressional Budget Office.
The investment team expects Congress, the White House and the U.S. Federal Reserve to extend massive stimulus support for individuals and businesses this year.
Consumers are in strong shape, thanks to rising financial markets and home prices that have boosted net worth to all-time highs, Galvin said.
At the same time, household debt - as a percentage of disposable income - has fallen to record lows, he explained, citing data from the St. Louis Fed.
“The lower debt burden is a positive development, as it will be foundational for a multi-year expansion," Galvin noted. “There's a lot of pent-up demand out there, which should fuel the economy" as people become more confident going out and spending money again, he said.
Meanwhile, the job market is poised to recover more quickly than it has following other recessions, Galvin said. Two-thirds of the 25 million jobs initially lost during the pandemic have returned already, and of the remaining jobless Americans, nearly half are temporarily laid off, he said, citing the Bureau of Labor Statistics.
Early in the pandemic, the City National Rochdale team set aside a cash buffer to help preserve capital for clients during a time of great uncertainty. As confidence in the recovery has strengthened, they've shifted to a capital appreciation strategy and are fully invested after increasing equity exposure, including buying some mid- and small-cap stocks that should benefit from the stronger economy, Galvin said.
Given high stock valuations and an expectation that interest rates will remain low for some time, Rochdale managers expect the traditional 60 percent stock-40 percent bond portfolio to achieve only 5 percent annual long-term growth rather than the 10 percent returns it generated over the past few decades.
They suggest that investors who are willing and able to broaden their strategy to meet long-term goals should shift from investment-grade to high-yield bonds, including high-yield municipal debt and structured credit, and to alternatives such as collateralized loan obligations, in addition to select equities.
The team remains focused on high-quality growth and high-dividend U.S. equities and Asian emerging-market stocks, based on positive growth outlooks in those regions, Galvin said.
U.S. stocks have outperformed European stocks, and Asian equities have outpaced other emerging-market regions over the past five years, he noted, citing various market sources.
While equities are expensive now on an absolute basis, they have "been on a historic tear, a freight train" without correction and remain attractive compared with bonds, despite pockets of "irrational exuberance" in the market, such as speculative tech stocks that Rochdale doesn't own, Galvin said.
The chief investment officer said he isn't worried about a market correction. “I would welcome a correction because I believe we are in front of a multi-year expansion, and we would view it as a buying opportunity," he said.
Rochdale is focused on undervalued businesses that should benefit from the rebound and a return to normal spending patterns, including brick and mortar retail, home-focused consumer purchases, semiconductors used in cars and industry, select consumer-oriented financial services and industrial production.
High-dividend stock yields and valuations remain attractive compared with, respectively, the U.S. Treasury yield and growth stocks, said David Abella, City National Rochdale senior portfolio manager, citing various market sources.
“We are looking forward to a much better future starting this year, as the economy becomes more normal and not just pockets of high growth," Abella said. "That has been traditionally good for our companies and our stocks."
Rochdale's high dividend and income strategy has produced consistent returns and income long term, Abella said, citing 9 percent average annual returns since 2003.
Meanwhile, Rochdale leaders believe they're well-positioned for a new credit cycle, with high-yield debt remaining "incredibly attractive," said senior portfolio manager Charles Luke.
High-yield defaults appear to have peaked at lower levels than in past crises, Luke said, reflecting an improving environment that should generate strong returns from high yield bonds.
Defaults shouldn't worry investors much, he said, explaining that rebounds enable outperformance.
A rally in the riskier parts of the high-yield market — energy and the lowest-rated debt — "signals that the market is comfortable with high yield ... that stabilty has returned to the market," Luke said, citing Bloomberg and ICE Data Services.
While positions in high-yield debt should result in higher returns for the next few years, investors must accept that these assets come with higher volatility, Luke said.
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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Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.
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.
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.
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 ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.
The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
The S&P/LSTA (Loan Syndications and Trading Association) U.S. Leveraged Loan 100 Index measures the performance of 100 large loan facilities meeting specific inclusion criteria. The index is modified market value-weighted and is fully rebalanced semi-annually. In addition, the index is reviewed weekly to reflect pay-downs and ensure that it continually maintains 100 loan facilities.
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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 January 27, 2021 presentation, "2021 Outlook: Pivoting to a Post-Pandemic Expansion" is reprinted by permission from City National Rochdale.
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