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April 09, 2020

Looking for Light at the End of the Tunnel

As the coronavirus pandemic persists and business shutdowns nationwide throw millions more Americans out of work, City National Bank's investment team expects more drastic short-term economic repercussions than they did just a week ago.

At the same time, though, the bank's investment managers see reassuring signs and continue to anticipate a steady economic and market recovery in coming months – assuming containment of the lethal outbreak and further government measures are undertaken to support workers and businesses.

The team maintains its expectations that the sharp economic decline will last no more than two quarters, with a recovery underway before year end.

“We are probably in the darkest phase of COVID outbreak and there is a saying, it's always darkest before the dawn," Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization, told clients during a weekly market update on April 6.

“While we're not being overly optimistic," he added, the team is looking for glimmers of recovery down the road. They remain focused on client portfolios, searching for stocks and bonds in more resilient sectors that are strategically important to the economy.

D'Alessandro outlined dire forecasts for near-term job, earnings and productivity losses as well as positive forces that should help lift the economy. “It's nowhere near over," but some trends are moving in the right direction, he told clients.

Unemployment numbers are “staggering," D'Alessandro said. City National Rochdale has updated its near-term forecast for initial jobless claims to 5 million a week now from the 3.5 million a week projected on March 23. The team, which originally projected more than 10 million new jobless claims over a three-week period starting late last month, now forecasts 16 million for the same stretch. 

U.S. Initial Job Loss Claims

The gross domestic product forecast has become more severe in the short term, too. In mid-March, D'Alessandro's team anticipated GDP would shrink by 15 percent annualized in the second quarter and turn positive by the fourth quarter, ending the year down 2 percent. Now, they see a 35 percent annualized GDP loss in the second quarter, a positive Q4 and a 5 percent loss for the year.

US GDP: Preliminary CNR Forecast

This is an unprecedented slide, he said, noting GDP declined 9 percent on an annualized basis before the Great Recession more than a decade ago. “This is orders of magnitude, three times or four times worse, and happening within a brief period. This is a devastating period of decline," D'Alessandro said.

Turning around the economy and markets will depend on containing the coronavirus, with greater testing and tracking a key component. Social distancing, while painful economically, does mitigate fatalities, D'Alessandro noted.

He cited an initial Imperial College London model forecasting 2.2 million U.S. fatalities without social distancing, compared with a more recent Washington Institute for Health Metrics and Evaluation projection of 100,000 to 240,000 through Aug. 4, 2020, with social distancing rules in place throughout much of the country. The lower end of that range appears more likely, he said.

“No death is acceptable, no death is good news," but social distancing is curbing fatalities, D'Alessandro said.

A vaccine will need to be developed, approved and administered on a broad basis before all restrictions can be lifted, which probably won't happen for at least a year, he said, citing an American Enterprise Institute projection.

Slow The Spread

In the meantime, widespread testing and tracking are needed to resume more normal activity, allowing authorities to focus on isolating and tracking those who test positive, he said. The United States, which has lagged in testing, has started to ramp up capacity. But it will probably take another two weeks to reach the more than 1 million tests/week needed to help get cities back to normal, D'Alessandro said, citing data from the AEI and the COVID Tracking Project.

Weekly Tests in the U.S.

Trends in U.S. cases were mixed in the past week.

New York, epicenter of the U.S. outbreak, appears to be nearing a peak in the number of new cases and may reach that apex in the next week or two, followed by a decline to a manageable level, then a long process of figuring out normalizing behavior and economic activity, D'Alessandro said. On the other hand, new cases are accelerating in other states, he noted, citing data from Bloomberg and the COVID Tracking Project.

Officials may gradually start to lift social distancing policies in May, he said, citing University of Washington Institute for Health Metrics and Evaluation projections on hospital demand.

Peaks Mid-April to Mid-May

The City National investment team cited various indicators of positive trends in the past week.

  • Internationally, new coronavirus cases in hard-hit Italy and Spain declined and Europe may have turned a corner.

  • U.S. government policymakers already are talking about the next phase of their economic and healthcare response and appear poised to provide trillions of dollars more in support for industries, small business, consumers and workers who've lost their jobs amid shutdowns and stay-at-home orders.
speedometers

“We're clearly not out of this yet so they're going to need to come up with another economic and policy response plan," he said, citing the $4 trillion that the Federal Reserve already agreed to inject into the economy and the $2 trillion stimulus package that Congress recently passed. The U.S. economy will probably need another $1 trillion to $2 trillion in support, D'Alessandro said.

Target Group

In May and June, the equity markets will likely start seeing positive data, creating new prospects for investors, he said. City National Rochdale sees opportunities across asset classes, including U.S. equities, high-dividend U.S. stocks and emerging-market equities.

Recovery will vary by industry. “We want to be in industries that benefit from normalization, that are strong growers near-term and long-term, and that are strategically important to the economy," D'Alessandro said.

The team is interested in food retailers, e-commerce, cloud-based software, hospital equipment and pharmaceuticals, among other industries, while downplaying energy, materials, and travel and entertainment investments for a while, he said.

Business Category Table

On the fixed-income side, the City National Rochdale team believes inexpensive high-yield bonds for companies that can pay their bills during the outbreak may present opportunities, with fast food company bonds likely to rebound. 

Bond outlook for Fast Food, Ride Sharing, and Energy Companies

Overall, City National Rochdale takes a goals-based approach focused on aligning portfolios with clients' specific needs, seeking diversification and keeping abreast of the market environment to manage risk.

If you have any questions about your portfolio, please contact a City National investment consultant.

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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 April 6, 2020 presentation, “Always Darkest Before the Dawn: Looking For Light at the End of the Tunnel," 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.