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June 12, 2020

Weekly Market Update: What We Don't Understand

The U.S. economy now appears to be recovering from the devastation inflicted by the coronavirus pandemic.

Although uncertainties remain and the recovery is gradual, City National Bank's investment team noted during their weekly market update on Wednesday.

While portfolio managers expressed concern over COVID-19 rates rising in some areas, they also cited data showing how U.S. hospitalizations and positive tests have trended down.

Compiled after roughly six weeks since the first states began reopening, data shows overall hospitalizations and positive test results are decreasing, and states experiencing an uptick in cases appear well-equipped to handle new patients, the team added.

Chin up: Employment is rising again

Significantly, Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization, pointed to a major "positive surprise" in employment figures from late May, when the country reportedly added 2.5 million net jobs after losing 20 million a month earlier, per Bloomberg data.

This is because businesses have started rehiring after unemployment hit bottom last month, which is earlier than the portfolio managers had expected, he explained.

“The worst of what we believe is likely to have occurred is behind us," D'Alessandro said.

Absent a severe, unmanageable second wave, the investment managers believe the economy has started a "gradual, steady" recovery, he said.

Reopening Drives Rise in Employment

Meanwhile, stay safe

D'Alessandro said the team will continue to monitor data for potential virus resurgence.

As states progress through reopening phases, the team has been encouraged not to see a major, widespread uptick since Memorial Day.

So far, modest second waves in the United States, Europe and Asia have been manageable in terms of hospital and ventilator capacity, he said.

Business is better, but it's not good

The team expressed increased confidence in a rebound during the second half of 2020, given business reopenings and increased COVID-19 testing.

Nonetheless, City National Rochdale maintains a cautious stance toward the financial markets.

Team members reiterated their view that stocks' recent rally to pre-crisis levels, which was an unprecedented move, was premature. Chances of pullbacks remain quite high, they said.

In fact, the day after the team's market update last week, the stock market experienced a major selloff.

The details

The drop came after U.S. infections surpassed 2 million, and the Federal Reserve forecast a 6.5 percent GDP contraction this year.

financial market indicators

D'Alessandro cautioned investors against comparing the COVID-19 economic crisis to previous U.S. recessions.

Instead, he said to think of the pandemic as a first-of-its kind event and not to overlay prior crises onto their expectations.

“We don't think that this downturn should be compared to any previous recession that we've had in our lifetimes," D'Alessandro said.

Nevertheless, recovery is expected

Citing Bloomberg data, D'Alessandro said the policy responses that came from the U.S. government, the Fed and other central banks to support economies with "trillions and trillions and trillions of dollars" have provided a bridge for business and will drive the recovery.

He also noted how these policy responses are unprecedented and did not occur in any previous recession.

Strong policy response drives recovery

There are various forces affecting the economy and businesses in these low-return times. Given this, the team is focusing portfolios on high-dividend stocks, high-yield bonds, emerging market stocks and alternative investments.

The right move depends on client circumstances and risk tolerance.

The team also is focusing on reserving cash to take advantage of attractive opportunities.

Building portfolios for a low-return world

Investors, these are next best steps

As the Fed keeps interest rates low, investment-grade bonds are unlikely to produce significant income.

Instead, investors could realize solid income and total returns from high-yield instruments, City National Rochdale Chief Investment Officer Tom Galvin said, citing data from Bloomberg and other sources showing out-performance by non-investment grade debt year-to-date.

Investment Grade Bonds

Relative to investment-grade bonds, yields from high-dividend stocks also are attractive.

In fact, Bloomberg data show these equities present an opportunity, as they have lagged growth stocks by 20 percent year-to-date as of June 8, he said.

Growth stocks have outperformed high dividend stocks

Those alternative investments not commonly found in public markets won't be a good fit for everyone, D'Alessandro warned. They must be worthwhile in their potential to add healthy returns and diversification.

City National is looking at infrastructure assets and royalty strategies for investors willing to sacrifice liquidity for higher income, he said.

Here's why

The City National Rochdale team cited several metrics behind their market position and economic outlook, including:

  • Gradual recovery. While recent jobless figures are encouraging, 21 million people remain unemployed, and millions more not counted in the government's official numbers remain on the sidelines, D'Alessandro said.

It could take up to two years to get everyone back to work, he said, faster than the average four-year recession recovery.

  • Promising disease trends. Nearly six weeks since states started reopening, hospitalizations are flat or at least down in most of them. Furthermore, the team currently sees no cause for alarm about a second wave, said Ben Goetsch, City National Rochdale senior analyst, investment solutions, citing data from The COVID Tracking Project.

However, a few states — led by Arizona, California and North Carolina — are seeing increases, said Goetsch.

While the team is concerned about and watching Arizona's rising hospitalizations, Goetsch said, “This is pretty good news overall, considering all of the businesses that have come back to life during this time period."

No major increases in hospitalizations

Arizona reopened in mid-May, and while hospitalizations have grown substantially, facilities there are not overwhelmed right now as New York's were in April, he noted, citing COVID Tracking Project and Institute for Health Metrics and Evaluation data.

Goetsch also cited other COVID-19 tracking project data, which shows fatalities trending downward generally, albeit with increases in several states.

Hot spots but well below hospital capacity

While California shows an increase in new cases, Goetsch attributed the trend to higher testing activity and noted how hospitalizations in the state are flat, per The COVID Tracking Project.

Continue to be guided by data rather than headlines
  • Testing expands. Meanwhile, testing recently surpassed 3 million per week nationally.

After taking a brief pause in testing, the country is seeing the rate of positive cases falling to 5 percent, Goetsch said.

Moving forward, a more proactive approach toward testing could boost public sentiment toward returning to business activities, he added.

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.

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 Dow Jones US Select Dividend Index includes a selection of stocks based almost entirely on dividend yield and dividend history. Stocks are also required to have an annual average daily dollar trading volume of more than $1.5 million. These criteria help to ensure that the index represents the most widely traded of the markets highest-yielding stocks. 

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 Bloomberg Barclays U.S. Corporate High Yield Index covers the U.S.-dollar denominated, non-investment grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.

The MSCI Emerging Markets Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

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.

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 Bloomberg Barclays US Treasury Intermediate Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with maturities of 1 to 9.9999 years 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 June 10, 2020 presentation, “What We Do Not Understand," 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.