City National's final 2020 market update will be published on Dec. 18. The investment series will continue in early 2021.
Coronavirus vaccine breakthroughs signal a stronger U.S. economic outlook for 2021, even as the country deals with soaring infections and hospitalizations in the near term, City National Bank's investment team said this week.
Unemployment should recede throughout next year, boosting income and spending, while higher confidence will likely drive economic activity and inventory rebuilding in the spring, according to leaders from City National Rochdale, the bank's investment advisory organization.
"By summer 2021, the United States will be, from an economic and financial point of view, in a post-COVID state of mind," City National Rochdale CEO Garrett D'Alessandro predicted on Thursday, Dec. 3.
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The investment team, noting its increased confidence in the economic outlook, expects earnings for S&P 500 companies to reach record levels next year and to continue growing into 2022. Stock returns could exceed average next year, then moderate longer term, D'Alessandro said.
Despite promising vaccine developments, the economy faces several pressures from now through March — a winter coronavirus surge, increasing pandemic-driven restrictions, and, for now, a delay in a new emergency fiscal stimulus package from Washington — D'Alessandro noted. Economic growth will likely slow in the first quarter of 2021, weakening from current conditions, he said.
Longer term, the widespread availability of effective vaccines, expected by mid-2021, combined with higher employment and pent-up consumer demand should boost the U.S. economy next year, D'Alessandro said.
Vaccine distribution to healthcare employees is expected to start on an emergency basis in two weeks, with other essential workers and high-risk populations added every two weeks, gradually and steadily reducing the coronavirus risk, D'Alessandro said.
That schedule is based on recommendations this week from a Centers for Disease Control and Prevention immunization advisory committee, which followed recent clinical trials indicating two vaccine candidates exceeded 90 percent effectiveness against COVID-19.
Vaccines are likely to become broadly available in the United States by early April, according to Ben Goetsch, City National Rochdale senior investment analyst. Survey data indicate a majority of Americans are likely to get vaccinated, based on the vaccine candidates' unexpectedly high efficacy, he said.
"This might be the last big push of the virus," Goetsch said, citing data from the Institute for Health Metrics and Evaluation. Consumer sentiment should increase as vaccinations reduce virus cases and hospitalizations, he added. "This is going to happen fairly quickly."
Fatalities will likely peak in late December or early January nationally, then return to a downward trend, Goetsch said, citing data from the COVID-19 Forecast Hub.
Although current U.S. coronavirus cases and hospitalizations have far surpassed previous peaks, government restrictions have been less severe than they were in early spring, and that translates into a more muted economic effect, D'Alessandro said. He pointed to data from the Oxford Policy Stringency Index, the COVID Tracking Project and the IHME.
"The stock market continues to move ahead," reflecting that economic resiliency, D'Alessandro noted. “The resiliency of the earnings for the S&P 500 have been surprising to everybody on Wall Street, not just City National Rochdale."
While the rise in coronavirus cases and hospitalizations nationwide has dimmed sentiment for now, Goetsch said, the narrower restrictions "indicate a tendency to muddle through the winter."
Massive stimulus packages that Washington policymakers approved earlier in the pandemic have injected trillions into the U.S. economy, averting a spike in bankruptcies like that seen in the 2008-2009 financial crisis and positioning the country for growth, D'Alessandro said, citing Bloomberg data.
Emergency pandemic legislation helped boost incomes and savings, and in turn net worth, which may sustain consumer spending through the virus surge and fuel growth in 2021, he said, again citing Bloomberg. Rising investment and housing prices have lifted net worth as well, D'Alessandro noted.
Rochdale leaders, meanwhile, expect no near-term adverse economic effects from the election transition, and are heartened by President-elect Biden's appointment of former Federal Reserve chairwoman Janet Yellen as Treasury secretary.
“We actually know her well and we like the approach that she has taken historically in terms of budget deficits and labor markets, so we like that appointment," D'Alessandro said.
The team continues to like high-dividend stocks and high-yield corporate bonds, given high stock valuations and low interest rates. Anticipating a return to normalcy next year, Rochdale's portfolio managers have been increasing clients' exposure to growth stocks, D'Alessandro said. In the meantime, market volatility from surging coronavirus cases could create "a good buying opportunity," he said.
City National Rochdale Chief Investment Officer Tom Galvin explained that over the summer, the team started shifting from a capital-preservation stance to target capital appreciation opportunities, as the economy regained strength and vaccine development progressed.
Portfolio managers have raised exposure in both stocks and fixed-income investments, focusing on high-quality, undervalued stocks with earnings and dividend growth, Galvin said. The team continues to favor high-yield bonds and other high-income alternative investments over lower-yield investment-grade corporate bonds, he said.
Looking to a return to a more normal economy, the investment leaders have focused increasingly on investments in brick-and-mortar retail, home goods and businesses aligned with normal spending patterns, as well as select semiconductor, financial services and manufacturing companies, Galvin said.
Stocks appear fully valued but remain attractive compared with bonds, Galvin said, citing Bloomberg and FactSet data. He noted that high-dividend stock valuations continue to lag more expensive growth equities, but suggested that may start to change soon, citing various market data sources.
"I do think we're seeing the very early stages where the tides are shifting," Galvin said. As the economic outlook improves, companies may reinstate or raise dividends, which could drive high-dividend stock prices higher, “reflecting what I consider optimism in the post-pandemic state of mind," he said.
Given a long-term outlook for high stock valuations and low interest rates, Rochdale leaders suggested investors consider adjusting their risk tolerances and portfolios to achieve long-term financial goals.
Low interest rates and expensive stocks will make it increasingly difficult for investors to achieve 6 percent to 8 percent returns in a traditional portfolio holding 60 percent stocks and 40 percent bonds, Galvin said.
Rochdale's active management team uses six different client risk profiles, from conservative to maximum growth, to develop intelligently personalized portfolios built on healthy yields, Galvin noted. “In a lower-return world, having an emphasis on visible income we believe is important and an active risk modifier."
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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 S&P 500 Growth Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed betweenthe value & growth indices. Prior to 12/19/2005 this index represented the S&P 500/Barra Growth Index.
The Bloomberg Barclays U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more.
Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity.
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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 December 3, 2020 presentation, “In a Post-COVID State of Mind," is reprinted by permission from City National Rochdale.
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