Persevering through uncertainty at a grocery store

August 21, 2020

Persevering Through Uncertainty: Weekly Market Update

Unsteady consumer confidence and lawmakers' failure to approve another emergency stimulus package are hindering the economic recovery, according to City National Bank's investment leaders, who nonetheless don't anticipate a new recession.

The team expects Congress to craft a new stimulus agreement, which would include extended unemployment benefits for millions of Americans who have lost jobs amid the coronavirus pandemic, in the coming few weeks.

“The failure to approve a new stimulus package and extend unemployment benefits was disappointing, and we think this failure will slow down the recovery. But we don't think it will cause a return back into recession, said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization, during the team's weekly market update.

“Consumer confidence is being diminished or shaken not just because of the failure to extend the stimulus and the unemployment benefits, but also because of the lack of a cohesive health plan, social unrest and a host of factors," he said. "And it's this lack of confidence more than anything that is impeding the progression of the recovery or the resumption of our modest growth."

The labor picture should continue to recover, albeit at a slower pace, with unemployment likely to hit 9 percent by year end, D'Alessandro said.

More small and medium-sized businesses will fail as a result of the pandemic, he said, adding that a mismatch between lost jobs and the skills needed in high-tech industries will lead to permanent job losses.

Positive Developments

The City National Rochdale team outlined encouraging developments as well, including gradual declines in high numbers of coronavirus cases and hospitalizations across much of the country, unprecedented global efforts to quickly find a vaccine, a forthcoming at-home COVID testing kit, recovering retail sales and a record high level of consumer net worth — despite high unemployment.

Data from multiple sources, including The COVID Tracking Project, show ongoing declines in hospitalizations and a recent plateau in coronavirus fatalities. As of Aug. 15, no states appeared to be in the "red zone" category marked by increasing hospitalizations and high positive test rates, as most of the country progressed toward reaching targets necessary to reopen their economies, D'Alessandro said.

Cases and Hospitalizations continue downtrend in the U.S.
Most of the U.S. is making progress towards reopening targets

Economic Growth

The investment leaders continue to expect corporate earnings to rebound by 20 percent to 40 percent next year but noted that equity valuations are high. A stock market correction "wouldn't surprise us," D'Alessandro said. Rochdale's portfolio managers always focus on managing risk to principal, he added.

“Retail sales have rebounded strongly from the low levels seen in April," City National Rochdale Chief Investment Officer Tom Galvin said, noting that consumers are spending money on goods, particularly those related to nesting and home improvement rather than vacations and travel.

The retail growth rate has slowed recently, however, and if Washington doesn't approve another effective stimulus package soon, "we would expect growth will slow further and impede spending through the end of the year," Galvin said.

Retail sales improved in July
Consumer spending preferences impacted by social distancing

The team expects consumers to remain resilient, D'Alessandro said. Walmart and Target have started to expand store hours, indicating some confidence that consumers are starting to resume a semblance of normal activity and learning to live with the pandemic.

Childcare and Education Remain Problematic

School closures, however, have had a significant effect on the economy, with childcare problems as a top reason for work loss and closed schools presenting a hurdle for the job market, D'Alessandro said, citing a U.S. Census Household Pulse Survey.

Citing multiple sources, he noted that 66 percent of U.S. school districts are starting the new academic year with remote learning only, with 16 percent using hybrid models and another 16 percent offering full, in-person learning for all students.

School closures have a significant economic impact

Anticipating the Vaccine

In the positive column, D'Alessandro cited a McKinsey & Co. report that documented a nearly $7 billion global investment in developing 250 coronavirus vaccine candidates, along with new processes that accelerate vaccine creation.

Manufacturers are expanding capacity now, even though U.S. regulators haven't yet approved a vaccine. Because it takes months to ramp up, a new vaccine is unlikely to become widely available before 2021, he said.

Several vaccine candidates in advanced clinical stages
Vaccine manufacturers are increasing capacity

Political Considerations

The Rochdale team also outlined potential effects on the stock market and client financial strategies, should Democratic presidential nominee Joe Biden win the election in November. Several polls, on average, show Biden with a 7.5-point lead, D'Alessandro said.

The market tends to perform better in election years when the incumbent party wins but does slightly better the following year when a challenger wins, Galvin noted, citing Ned Davis Research and S&P Dow Jones Indices.

Market performance often reverse after elections

Based on Biden's proposals. his victory could result in higher personal income tax rates, increased Social Security and Medicare taxes for high earners and higher corporate income taxes, among other changes.

Biden's proposed 28 percent corporate income tax — up from the current 21 percent — could cause an 8 percent to 11 percent hit to S&P 500 earnings and limit plans for company hiring and investments, Galvin said, noting that this possibility probably isn't fully reflected in current equity prices.

What if Personal Income Tax Rates go up in 2021

"If there is a Democratic win, taxes could significantly increase next year," said Jeffay Chang, a City National Bank trust advisor. He recommended that investors talk with their tax and portfolio advisors about possible strategies to limit the impact on their finances.

Client Portfolios

Clients might consider deferring compensation in 2021 and beyond to limit their tax burden should rates increase, and small business owners might consider exploring cash benefit defined compensation plans that would allow them to make higher contributions to employee accounts and, at the same time, take bigger deductions, Chang said.

Investors could also consider deferring capital losses to 2021 to reduce next year's tax bill, accelerating bonuses or other income this year while the tax rate is lower or exercising certain company stock options this year, he said.

Rochdale advisors also are talking to clients about converting traditional investment retirement accounts to Roth IRAs this year to reduce exposure to higher income tax rates. Under the right circumstances — a 20-year retirement time horizon and using money from outside the IRA to pay conversion-related taxes — investors could realize significantly more at retirement with this strategy, Chang said.

What strategies are being discussed
Potential benefits of a Roth IRA conversion

Portfolio manager Rachael Crane noted that with highly liquid assets such as Treasury bonds at historically low yields, investors might consider allocating part of their holdings to illiquid strategies that can boost income. While these alternative assets may prove more volatile short-term, they can provide long-term benefits, she said, citing multiple data sources.

Utilizing the full spectrum of liquidity

Crane used a hypothetical client to illustrate potential outcomes from different allocation strategies, with a moderate-risk, moderate-liquidity portfolio generating more retirement income than a more conservative, low-liquidity plan.

Adjusting liquidity preferences to meet goals

More broadly, City National Rochdale has taken an overweight position in U.S. healthcare stocks and a market weight stance toward tech stocks, while staying underweight in consumer discretionary, financial and industrial firms, Galvin said, citing market and economic conditions and possible governmental policy changes.

U.S. Core Equity Positioning

Biden's proposed tax and policy changes, including potential anti-trust policies, could make a significant impact on tech firms, although the industry's strong non-cyclical nature should cushion the hit, Galvin said.

“The momentum for either taking antitrust actions against the tech titans or rewriting laws that have fostered the growth of the internet and e-commerce would probably take a couple of years to unfold but could hurt stock prices," he said.

While there's been a rush to high-quality tech firms during the pandemic and a correction is possible, the bigger titans' valuations "aren't all that bad" given strong company fundamentals, Galvin said.

The healthcare industry, meanwhile, could benefit from higher demand if a Medicare-type plan for all citizens materializes under a potential Biden administration, he said.

Biden's proposed increase to the corporate tax rate
Implications of potential policy changes

In this election season, City National Bank and its investment advisory organization, City National Rochdale, are committed to delivering objective, non-partisan market analysis and investment guidance, with the goal of helping our clients make informed financial decisions.

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 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 Swiss Re Cat Bond Index tracks the return for all outstanding USD denominated cat bonds. The index is based on Swiss Re pricing indications only. 

The Bloomberg Barclays US Treasury Intermediate Index measures US dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with maturities of 1 to 9.9999 years to maturity. 

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 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 August 19, 2020 presentation, “Persevering through uncertainty — stay positive," 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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