Returning to work

May 29, 2020

The Long Road to Recovery

As consumers try to balance their ongoing fears over the coronavirus pandemic with the desire to resume normal activities, the U.S. economy faces a long, steady road to recovery, City National Bank's investment leaders said during a weekly market update.

Currently, all 50 states have reopened to varying degrees, with some states registering a slight uptick in infections, the team told clients.

A second COVID-19 wave is likely as states reopen for business, although evidence of a significant resurgence hasn't appeared in those places that have lifted restrictions in recent weeks, they noted.

"We don't think there's going to be a robust recovery this year," said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization.

Rather, his team expects the economy to hit a trough in June or July before gradually regaining strength over the next several quarters.

Optimism about market earnings is questionable

Assuming businesses successfully resume commercial activity in the coming months, D'Alessandro doesn't expect a significant recession.

"We cannot have the shutdown that we have for many more months because then I will change the way we are talking about a depression," he said.

Although select investment opportunities remain, large-cap U.S. stocks in the Standard & Poor's 500 Index have become overvalued as Wall Street shows too much optimism about earnings and the timeline for coronavirus vaccine development, D'Alessandro said.

"The fundamentals are gradually getting better but the market's a little ahead of that," he said.

Meanwhile, the financial markets

Overall, City National Rochdale maintains a conservative, cautious stance toward the financial markets.

High Yield Bonds Positioned Better Than Stocks

Various trends in COVID-19 progress and business activity drive the team's forecasts and strategy.

Sentiment Suggests a Gradual Recovery

Consider long-term investments

The investment team considers high-dividend stocks attractive for long-term investors and has focused on companies unlikely to cut dividends.

They favor high-yield bonds and noted that investment-grade bonds' yields are likely to remain low for a while.

"We like high-yield bonds. They offer more attractive risk-reward potential than the S&P 500 Index does today" and are well-positioned for a good recovery after the crisis recedes, City National Rochdale Chief Investment Officer Tom Galvin said, citing Bloomberg data.

"We are confident that this asset class will rebound over time."

Stocks generally are likely to produce lower returns in the next five years based on their current values, so City National Rochdale remains comfortable with its underweight position in equities, he said.

Still, consumers proceed with caution

Consumers' attitude is key, as they account for two-thirds of economic activity, Galvin said, citing a tug-of-war between individuals' desire to reengage in the world and their concerns over the coronavirus.

Consumers are starting to return to normal behavioral patterns, with apparel and automotive sales picking up, Galvin noted, but consumer sentiment expressed in a May 17 Harris Poll supports the notion of a gradual recovery.

Just over half of consumers said they would be willing to go out to dinner within three months of the COVID-19 curve flattening, and only a minority is willing to take public transportation, fly on a plane or stay in a hotel during that period, he said.

The same poll, though, indicated that consumers are more worried about the pandemic's financial impacts than about the infection itself, D'Alessandro said.

As consumers pick and choose

A second wave, while likely manageable, will highlight tensions between those comfortable with some infection and fatality risks and those who don't consider any risk acceptable, D'Alessandro said.

In the past month, consumers have started to venture out and drive more in key cities but appear to be avoiding public transportation if they can, Galvin said, citing data from Apple.

Restaurant bookings, which went off the cliff when the pandemic hit, have gradually started climbing in reopened states, he said.

However, they are likely to take many months to fully recover, added Galvin, citing Bloomberg and Open Table data.

People are Starting to go Out

Behind the scenes

The team cited several other developments that factor into consumer outlook, including:

  • Unpredictable numbers. While all 50 states have seen infection spread decline from the rates seen early in the outbreak, several, as of Sunday, had seen a slight increase in estimated infections since reopening, statistics from show.

Trends in infection spread will indicate whether the reopening process is successful, D'Alessandro said. The picture looks good so far, he said.

Testing, tracing and isolating are key to controlling the second wave, and states need to take strong action in those areas, such as tracing cases and forcing those who test positive to stay home, get out of circulation and stay off airplanes, he said.

Too Early to Tell, So Far So Good
  • Meeting targets. Seven key states that started reopening over the past month — Georgia, Colorado, Tennessee, Texas, Florida, California and New York — have stayed below a 10 percent target for positive coronavirus tests, according to The COVID Tracking Project, which finds that U.S. testing continues to expand as positive test rates decline.

Europe, which is a bit farther along in the reopening process than the United States, hasn't experienced an unmanageable second wave, he noted.

Reopening Has Continued Without a Resurgence
  • Open doors. Small businesses are gradually reopening, and, if trends continue, they'll provide a good sign that these businesses are bouncing back, which is important in shaping the recovery, Galvin said, citing data from Womply.
Small Businesses Gradually Opening Back Up
  • Forecasting. Centers for Disease Control and Prevention estimates for hospitalizations and fatalities for symptomatic COVID-19 patients are "incredibly encouraging," according to D'Alessandro, noting projections that fewer than 2 percent of those age 49 or younger will require a hospital stay and fewer than 1 percent are likely to die from the disease.
Current CDC Estimates on the Virus
  • Teamwork. The Federal Reserve and government have organized an effective response to the pandemic, supporting consumers, businesses and municipalities and stabilizing the economy through lower interest rates and various other measures, including emergency lending programs for business.

Federal stimulus programs have helped bolster the economy as unemployment reaches unprecedented levels. Given ongoing unemployment and the expectation that jobless claims will peak in June or July, the team anticipates the government will provide another round of stimulus funding, possibly more than $1 trillion, over the summer.

The Fed is following through on "the right prescription" for supporting the economy and avoiding a depression, D'Alessandro said.

In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals to 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.

Standard & Poor's 500 Index is a widely recognized unmanaged index including a representative sample of 500 leading companies in leading sectors of the U.S. economy and is not available for purchase. Although the Standard & Poor's 500 Index focuses on the large-cap segment of the market, with approximately 80% coverage of U.S. equities, it is also considered a proxy for the total market.

The Bloomberg Barclays US Intermediate Corporate Bond Index measures the investment grade, fixed rate, taxable corporate bond market whose maturity ranges between 1 to 9.9999 years. It includes USD denominated securities publicly issued by US and non US industrial, utility and financial issuers.

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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 May 27, 2020 presentation, “The Long Road to Recovery," 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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