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July 09, 2020

Managing COVID-19 Uncertainty

The U.S. economic recovery is likely experiencing a lull this month - not a reversal - as surging coronavirus cases have prompted numerous states to pause or rewind the reopening process, City National Bank's investment team said this week.

City National Rochdale, the bank's investment advisory organization, maintains its view that the recession is over and the recovery is well-positioned to progress, CEO Garrett D'Alessandro said during the group's weekly market update on Wednesday.

That's not to say the rebound will be trouble-free, however. Keep reading for your weekly market update.

States strive to reopen, but not so fast

"The reopening of America is not expected to be a smooth, linear path," City National Rochdale Chief Investment Officer Tom Galvin said.

Only two states — New Jersey and New Hampshire — meet all four conditions established by the U.S. Centers for Disease Control and Prevention for a safe reopening, while a majority have met only one or two.

"So we have a long way to go," D'Alessandro said.

Given high stock valuations and the outlook for near-zero bond yields for at least another two years, City National's portfolio managers encouraged investors to consider a strategic shift in asset allocation to help maintain healthy income and returns during these uncertain times.

The investment leaders outlined several pandemic and economic developments affecting their market outlook. Here's what you need to know.

Rising U.S. Cases

While new coronavirus infection rates are generally flat or declining in the eastern and midwestern United States, cases are spiking in the South and West, D'Alessandro noted, attributing the rise to a lack of adequate safety protocols and partly to increased testing.

Debate about the measures that are proven to substantially lower transmission — including mask wearing and social distancing — is over, and new cases in the West and South should peak in one to two months once those states enforce such protocols, he added.

Asia and Europe "have really done a much better job" in controlling the lethal pandemic, and the United States can learn much from them. For instance, healthy Asian economic activity is showing what the country can achieve once it embraces the right safety protocols, D'Alessandro said.

Galvin cited anecdotal evidence that mask wearing is increasing in the United States.

While U.S. infections are rising, fatalities are trending down, likely due to improved treatment approaches and more cases among younger patients, according to Ben Goetsch, City National Rochdale senior analyst, investment solutions, who cited data from The COVID Tracking Project and covidactnow.org.

The team, however, expects to see a moderate rise in coronavirus fatalities in the coming months.

Rise in cases and hospitalizations, fatalities decline

COVID Tracking Project data also indicate that the rise in hospitalizations is starting to slow in three hot-spot states — Texas, California and Arizona — possibly because of restaurant and bar closures and new mask requirements, Goetsch said.

Early signs of slowing spread in several hot spot states

Testing availability has continued to improve in the United States and has neared 5 million per week, he said. Goetsch presented COVID Tracking Project data that indicates the increase in positive test rates reflects greater case numbers in some states but notes that the national rate remains below the 10 percent target.

Testing has surpassed initial goals

Economy Strengthening

Meanwhile, the U.S. and global economies show signs of strength.

The global economy has recovered 50 percent of the losses tied to the pandemic, and U.S., European and Asian governments remain committed to sustaining their economies through the recovery, D'Alessandro told investors.

The U.S. labor market regained more than 4 million jobs in June — better than expected — as companies brought back many temporarily laid-off workers. But unemployment remained higher than 11 percent as of June 20, based on data from Bloomberg, the team noted.

An increase in permanent layoffs since late April could restrain growth, signaling a more gradual recovery, Galvin said.

More permanent layoffs , more gradual recovery

While the Rochdale team doesn't expect gross domestic product to fully recover to pre-crisis levels until early 2022, there will be growth along the way, Galvin said.

When will GDP fully recover

Despite reopening setbacks, economic activity continues to improve, the CIO said, citing Bloomberg and Opentable data indicating consumers are dining out more despite virus surges in parts of the country.

Nonetheless, he added, the industry has a long way to go to reach pre-crisis levels.

Despite reopening setbacks, activity continues to improve

Galvin also cited Bloomberg data showing a rapid initial recovery in the services sector.

Services sector bounces back

Adjusting Portfolios

Given low corporate bond yields and generally high valuations for Standard & Poor's 500 Index stocks, investors need to consider adjusting their risk tolerances and allocations to maintain healthy growth in their portfolios, D'Alessandro said.

Investment-grade bonds, he said, likely will only preserve principal to cover inflation in the next few years, he explained.

Investors girding for a world of moderate returns may need to adjust spending, take on more volatility risk to achieve investment goals for principal not needed for at least a decade and be willing to shift portfolios, he said.

How do I plan for a world of moderate returns

While individual investors' circumstances may require different moves, the team expects that the traditional 60 percent-40 percent balanced stock-bond portfolio won't perform as well in coming years in comparison to optimized portfolios with lower exposure to investment-grade bonds and more investments in high-yield bonds, equities including high-dividend stocks and other alternatives.

Moderate returns expected

Short-term volatility and market crashes don't affect long-term portfolio goals or sustainable income as much as long-term muted returns, D'Alessandro said, citing data from the Nerd's Eye View blog.

Equity markets likely will be higher a year from now but face significant potential for downward volatility, he said.

How does volatility impact my goals

The Rochdale CEO presented a few scenarios to show how adjusting portfolios can make a significant difference.

Someone with a $3.5 million portfolio and at least 10 years until retirement, for example,  could achieve $103,000 a year in sustainable retirement income with a portfolio 75 percent invested in large-cap U.S. stocks and 25 percent in corporate bonds.

If, however, the portfolio consisted of 50 percent large-cap U.S. stocks, 14 percent high-dividend stocks, 9 percent emerging market stocks, 17 percent opportunistic income - which could include high-yield bonds - and 10 percent alternatives, they'd be able to realize $302,000 a year in retirement income, D'Alessandro said.

Example 10 years to retirement

Different optimized allocations should similarly perform better for those nearing and in retirement, he said.

Example nearing retirement

"This is for each client to decide how they want to pursue optimizing their investment assets," D'Alessandro 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.

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 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. 

The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) is a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector. The NMI is a composite index based on the diffusion indexes for four of the indicators with equal weights: Business Activity (seasonally adjusted), New Orders (seasonally adjusted), Employment (seasonally adjusted) and Supplier Deliveries. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.   

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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 July 8, 2020 presentation, “Agile Investment Strategies," 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.