City National Bank's investment leaders predict a strengthening U.S. economy in 2021, with a return to normalcy by next summer as coronavirus vaccines tame the pandemic, unemployment abates and businesses benefit from consumer savings and pent-up demand.
In the near term, however, they expect virus cases and hospitalizations to peak in the next two to four weeks, leading to slower consumer activity in the first quarter as various cities and states renew tight restrictions on social and business activity. They forecast zero growth for this period.
Keep reading for your Dec. 16 market and economic update.
"Our outlook is brighter for a number of reasons, including the vaccine developments," said Ben Goetsch, senior investment strategist for City National Rochdale, the bank's investment advisory organization.
Healthcare workers and nursing home residents started receiving Pfizer's coronavirus vaccine this week after authorities granted it emergency authorization, and Moderna's vaccine should gain the same approval within days, he said.
Goetsch also cited encouraging progress in government negotiations on a follow-up stimulus package. This package would help workers and businesses struggling as a result of the lethal pandemic and associated business shutdowns.
Such legislation also would likely serve as a near-term economic driver, he explained.
City National Rochdale portfolio managers said they will look for opportunities within market volatility in order to benefit from next year's anticipated economic growth.
"We want to be positioned for a post-pandemic world," Goetsch said.
In the meantime, though, the country continues to grapple with the virus, with cases, hospitalizations and fatalities rising nationwide and hospitalizations surging well beyond previous peaks, Goetsch said, citing data from the COVID Tracking Project and the Institute for Health Metrics and Evaluation.
"Things have gotten quite bad in terms of the number of hospitalizations we're seeing across the country," he noted, adding that the peak should come between New Year's Day and mid-January. “That gives you hope that these numbers will start to turn around fairly soon."
Hospitalizations are projected to decline through the spring, but some regions, including California and New York, could see facility capacity overwhelmed in January, Goetsch said, citing IHME data for 10 key states.
Despite the coronavirus surge, government restrictions nationally are notably less severe than in April.
At that time, much of the country was on strict lockdown, Goetsch said. Now, the U.S. ranges from few to moderate restrictions, depending on location, he said, citing information from the Oxford Policy Stringency Index.
Only a few areas have imposed severe, "red" level restrictions this time, he said. “We do expect some more moves into the red, but this is encouraging," signaling that economic activity won't be as deeply affected as it was in the spring, Goetsch added.
The complex vaccine distribution process, which includes administering two doses per person three to four weeks apart, could produce some hiccups but likely no major disruptions, Goetsch said.
Pfizer and Moderna have produced enough vaccine doses to vaccinate 25 million people in the U.S. in 2020, he noted. A majority of the U.S. population should have access to a vaccine by March or April, Goetsch explained, citing data from the U.S. Centers for Disease Control and Prevention.
He also noted that two additional vaccines may gain approval next year.
Rochdale's economic and market gauges indicate that a sustained recovery from the coronavirus crisis will be underway in the next six to nine months, with consumer sentiment and spending expected to improve markedly, spurring the economy, said Tom Galvin, Rochdale's chief investment officer.
Meanwhile, the virus surge and cold weather are impairing the economy in the short term, Galvin said, citing Womply, Bloomberg, OpenTable and Apple data showing a sharp decline in restaurant reservations in recent weeks and lower small business revenue and population mobility.
The data indicate consumers are taking a pause, spending more on housing and nesting and shifting away from department stores and restaurants, he said.
Low interest rates and supportive Federal Reserve monetary policy also are creating favorable financial conditions for economic growth, as businesses are able to obtain inexpensive financing to survive the pandemic or invest for growth, even as many encounter stresses, said Galvin.
Household net worth, boosted by the previous stimulus efforts and a strong housing market, has reached an all-time high, and corporate cash has reached near record levels, Galvin said, citing data from Bloomberg and the U.S. Federal Reserve.
“Consumers' net worth is in very good shape and that has a very positive correlation to forward economic activity," Galvin said. “It's not going to be a rising tide for all but cash on the sidelines is a good thing."
As business and lifestyle activities normalize throughout 2021, pent-up consumer demand for recreation, travel and other entertainment should drive spending, Galvin said, noting that consumer and small business sentiment have been improving. He cited data from Opportunity Insights, Affinity Solutions and Bloomberg.
In a market environment with low interest rates, low yields for investment-grade bonds and high stock valuations, City National Rochdale portfolio managers continue to like dividend-paying U.S. stocks, high-yield bonds and emerging market Asia investments.
They're using tactical asset allocation strategies to find market opportunities in order to benefit from post-pandemic growth, selectively investing in high-quality segments of the U.S. stock market.
Rachael Crane, City National Rochdale portfolio manager, noted that the team doesn't expect the traditional 60 percent stock-40 percent bond investment mix to help clients reach their goals as it did in the past, but to provide "a more modest return" in the long term.
Citing data from various market sources, she said a 60-40 portfolio is forecast to return 5 percent annually long term, compared with 10 percent annually from 1975 through 2019, given more modest anticipated stock and bond returns.
Rochdale "has been proactive. This is something we have been managing for some time," said Crane.
To make client goals more achievable, the team has been adjusting portfolios from the traditional asset allocation to more optimized investments focused on high-dividend stocks, emerging markets, opportunistic fixed income and other alternative investments, she said, pointing to Bloomberg data.
Opportunistic income includes investments such as European senior secured loans, certain emerging market high-yield debt and municipal bonds that the team has high confidence will be repaid, Crane explained.
With active portfolio management using an integrated approach, clients can find opportunities to reach their goals, according to Crane.
It may be appropriate for clients with long investing time horizons "to take on a little more volatility" by reallocating from bonds to stocks to get better returns, she said, noting that even if stocks are volatile in the shorter term, the risk of loss is low over long time horizons.
Asset allocations need to be rooted in client goals and plans, said Crane, citing the different levers Rochdale advisors use to personalize portfolios.
These include clients' tolerance for risk and volatility, their liquidity needs, tax management options including "harvesting" losses to offset income and personal constraints and preferences.
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.
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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 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 16, 2020 presentation, "Déjà vu all over again? ...not this time, vaccines on the way," is reprinted by permission from City National Rochdale.
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