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July 29, 2022

Adjusting Investment Strategies During Uncertainty

The headwinds of inflation, rising interest rates and global political uncertainty continue to roil markets and raise fears of a recession more than halfway through 2022.

Managers at City National Rochdale, City National Bank's investment advisory organization, provided their July 2022 update on July 27, the same day that the U.S. Federal Reserve raised the federal funds rate by 75 basis points in an attempt to tame inflation.

Strategy Amidst Global Uncertainty

The level and magnitude of uncertainty around domestic and global issues create a lack of consensus about the upcoming quarters, managers said.

“Because of the wide range of potential outcomes for any of these uncertainties, the ability to have confidence that we are or are not going to go into recession is very low," said Garrett D'Alessandro, City National Rochdale's CEO. “No one has high confidence in their ability to predict what will unfold over the next couple of quarters. That's uncomfortable, but everyone on Wall Street is dealing with it."

That said, Rochdale's leadership has developed investment strategies to manage uncertainty for different risk profiles and anticipates “higher for longer" volatility in the equity and fixed-income markets. They expect it will be at least two or three quarters before the Fed reaches its goal to reduce inflation.

Global volatility is also expected to last for the foreseeable future, so Rochdale has pulled out of European and Asian investments and is underweight in overall equity investments focusing exclusively on high quality U.S. companies. Investment grade corporate and municipal bonds offer reasonable returns at this time, instead of cash.

Inflation Remains a Concern as Fed Slows Economy

The most significant headwind currently is inflation that continues to reach levels beyond most economist's expectations, said D'Alessandro. Rochdale doesn't anticipate inflation will be pushed back to less than 3% by the end of 2022, which means the Fed will continue to take aggressive steps and drive interest rates higher.

Graph - City National Rochdale Forecasts

Rochdale's economic outlook is less optimistic and more cautious than the consensus view. While household and business fundamentals remain strong, inflation pressure is  anticipated to continue and Fed actions are likely to slow wage growth and the economy. Rochdale anticipates GDP to be 2% for 2022 and range from 0% to 2% in 2023. Inflation is expected to remain elevated at 7% to 8% for 2022 and moderate to 3% to 4% in 2023, according to their projections.

Chart - Economic Growth

Economic momentum is slowing, and Rochdale is evaluating an unusually wide range of potential scenarios for the economic outlook. The risk of recession is now at 50% as continued unprecedented levels of uncertainty negatively affect the U.S. economy, particularly those that are out of the Fed's control, such as supply chain issues and global political pressures.

CNR Speedometers

Rochdale's Speedometers, a forward-looking indicator of numerous economic metrics, would ideally show every dial green. This month, the array of headwinds means most are yellow, with only the labor market and consumer spending green.

Graph - Contributions to GDP

Would a Potential Recession Be Severe?

Rochdale anticipates economic volatility to continue and expects the Fed to be more aggressive in its policies.

“We are lowering corporate earnings expectations into 2023," said D'Alessandro. “We're not calling for a severe recession or even a normal recession at this point. All we're saying is that we don't have rosy-colored glasses on."

In addition to domestic pressures, global issues continue to impact the U.S. economy, including Ukraine and commodity problems. Rochdale added China to its list of global headwinds.

“China is taking a very harsh stand and buckling down on capitalism and business and corporations," said D'Alessandro. “We're unwilling to be exposed to that type of potential risk."

Chart - Employee Compensation 1954 - 2022

Corporate Profit Sharing Could Help Labor Shortage

A longer-term issue is wage pressure. Employees' share of corporate profits was about 60% from the 1950s into about 2000, before rising globalization led to the outsourcing of cheaper labor, said D'Alessandro. Since 2018 the balance of power has started to shift back and is escalating because of labor shortages.

“Companies need to bid up, pay more, be aggressive and share more of their corporate profits with their workers," said D'Alessandro. “We actually think that's a very good trend even though it might lower corporate profits. I believe in the resiliency of companies. They'll be more productive and innovative. Sharing more with workers, we think, will be healthy in the long-term."

Table - Stock Market Returns & Rallies

Will the Bear Market Continue?

Rallies are normal during bear markets, but investors shouldn't necessarily anticipate stocks to continue to go up, said Tom Galvin, chief investment officer for City National Rochdale. He doesn't believe the bottom has been reached yet.

“The average length of a bear market is about 14 months and we're in about seven months on this one," said Galvin. “So, we're about halfway through timewise. We're down about 23% so far, which means we're about two-thirds of the way for an average bear market in terms of declines."

Chart - GDP Growth

While the consensus is that corporate earnings in 2023 will be 11%, Rochdale believes that is too high, given the uncertainty in the economy, and could be a driver of further market declines. Rochdale's base case forecast for 2023 earnings is a much lower 5%. Until we get better clarity on the path of inflation Fed tightening and geopolitical risks, we don't think the market will find a durable bottom, Galvin said.

Investors should anticipate more modest equity returns in 2023 and that those looking for long-term capital appreciation who don't mind some short-term volatility should stick with high quality U.S. stocks, Galvin said.

For clients seeking higher income and less volatility, an equity income strategy focused on quality companies with stable earnings, cash flow and dividends is recommended, said Galvin. Those stocks should provide a 4% yield and better weather a recession should one occur, he added.

Chart - Bloomberg US Aggregate Bond Index Return

An unusual scenario in recent months has been the volatility in the bond market, said Galvin. The calendar year 2022  has seen the largest pullback on record in fixed-income investments since 1980. Galvin anticipates this volatility to continue because of the pressure of inflation and high interest rate sensitivity. The Fed's more aggressive actions shocked fixed-income markets that led to this unprecedented volatility.

Fixed Income Sector Annualized Total Return Potential

Fixed-income investment recommendations are based on long-term yield opportunities. While higher yields are a welcome change, investors should also be aware that price volatility will likely remain until inflation pressures abate. Depending on the trajectory of economic growth returns in the near term could be positive or negative.

Table - CNR Actions and Potential Actions

An Economic Rebound Is Not Impossible

Despite the uncertainties in the markets and the economy, there's room for optimism that the possibility of a rebound exists, said Galvin. However, it's difficult to have sustainable confidence in a rebound because of numerous global and domestic pressures on the economy.

Over the last several months, Rochdale took multiple actions to proactively raise the defensive profiles of their client's portfolios.

“We at CNR believe capital preservation is as important as capital appreciation," Galvin said. “When meaningful risks arise, we take appropriate action."

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 get 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.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results and  are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. 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.  Alternative investments are speculative, may entail substantial risks, offer limited or no liquidity and may not be suitable for all investors.

Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly  illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing  important tax information.

As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.

Diversification may not protect against market loss or risk.

All investing is subject to risk, including the possible loss of the money you invest.

This information is provided pursuant to a specific request and is for informational purposes only. None of the material, nor its content, nor any copy of it,  may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of City National Rochdale.  Analytical results have many inherent limitations and no representation is made that any investor will or is likely to achieve results similar to those shown.  Changes in the assumptions used may have a material impact on the derived performance presented. The views expressed are also subject to change based  on market and other conditions.

The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the  economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are  subjective and may be derived from data that contain inherent limitations.

City National Rochdale Proprietary Quality Ranking is the weighted average sum of securities held in the strategy versus the S&P 500 at the sector level  using the below footnoted formula.

City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability  (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet  Quality (fundamental strength of balance sheet). *Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a  percentile ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted  average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of June, 2022.

The information presented is for illustrative purposes only based on various assumptions. No representation or warranty is made as to the  reasonableness of the assumptions made or that all assumptions used have been stated or fully considered. There are no representation made that  any investor will or is likely to profit similar to those shown. This information is not intended to be used or construed as tax advice, and cannot be  used by the recipient for the purpose of avoiding penalties and/or any tax liabilities that may be imposed under local tax codes in the applicable  jurisdictions.

The material contains forward or backward -looking statement regarding intent, beliefs regarding current or past expectations. 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 subject to change based on market and other  conditions. There can be no assurance that an investor will achieve profits or avoid incurring losses.

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.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual  results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. 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.

Alternative investments are speculative, may entail substantial risks, offer limited or no liquidity and may not be suitable for all investors.

Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be  highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays  in distributing important tax information.

As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.  Diversification may not protect against market loss or risk.

All investing is subject to risk, including the possible loss of the money you invest.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.  Past performance is no guarantee of future performance.

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.

Purchasing Managers' Index (PMI): The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and  service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same,  or contracting.

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. This commodity index comprises a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture,  7% to precious metals, and 13% to industrial metals. The CRB is designed to isolate and reveal the directional movement of prices in overall commodity trades.

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.

Michigan Consumer Confidence Index: The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States  conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy.

Conference Board Measure: The Consumer Confidence Survey® reflects prevailing business conditions and likely developments for the months ahead. This  monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates. Data are  available by age, income, 9 regions, and top 8 states.

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 July 27, 2022 presentation, "Higher for Longer: A Deep Dive into CNR’s Economic and investment 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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