As a majority of states have started to reopen their economies and emerge from the coronavirus shutdown, individuals remain concerned over their health amid the lethal pandemic, City National Bank's investment leadership team said during a weekly market update on May 13.
Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization, cited several key developments related to the pandemic and the economic dynamics surrounding it.
In fact, 80 percent of states have reached or are approaching adequate testing levels, according to D'Alessandro, who added that "adequate" isn't the same as an optimal testing rate.
“We estimate that 35 million people have no visible means of job income," an unprecedented situation for the U.S. economy, he said.
The stock market, which dropped sharply earlier in the pandemic crisis, has recovered more quickly than is appropriate, he said.
U.S. equities, however, continue to outperform overseas stocks, so clients have benefited from City National's longer-term decision to emphasize large-cap American companies, he noted.
Select emerging Asian markets also are faring better than much of the world, he added, citing data from various market sources.
Human behavior is vital in successful investing and in the economic recovery, as individuals' perceptions of events drive their decisions, D'Alessandro said.
"We all have errors in the way that we translate what's happening in the media," he said.
The sharp job losses, earnings declines and bankruptcies precipitated by the coronavirus pandemic are bombarding people's senses, significantly affecting how they process the headlines. “There's nothing that affects us more than our health, our family's health," D'Alessandro noted.
He cited a behavioral experiment showing that the way data is framed - positively or negatively - affects the way people take it in and make choices, and said the news media have tended to frame all coronavirus data negatively.
Current data doesn't suggest that the key states reopening their economies now will have trouble, according to D'Alessandro, who said COVID Tracking Project data indicates that the United States, outside the New York Tri-state region, appears to be in good shape for the most part.
The country's widespread economic shutdown aimed to avoid overwhelming hospitals beyond their capacity to treat patients, and it has worked, he said.
"Shelter in place has succeeded" and most major states reopening now have ample capacity to handle coronavirus cases, D'Alessandro said, citing data from various sources.
Florida, California, Texas, North Carolina and Georgia, for example, have far more hospital resources than they need and have suffered devastating job losses because of the economic shutdown measures, he said.
The City National team did cite some potential issues and noted that 18 states are experiencing a greater than 10 percent rate in positive test results.
Of those states, only three — New Jersey, Connecticut and Maryland — appear to have relatively low hospital capacity, D'Alessandro said, citing COVID Tracking Project and IHME data.
"Clearly, New Jersey should not be reopening," he said, noting the state's 31 percent positive test rate and 18 percent available hospital capacity.
Consumer sentiment and behavior will be key to the country's economic recovery and both remain as headwinds, said Thomas Galvin, City National Rochdale chief investment officer. He cited a Harris Poll finding that 51 percent of Americans fear dying from coronavirus.
"This mindset, this fear, is real," Galvin said, but the fear level far exceeds the number of people likely to die from the disease.
Consumers won't become receptive to data-driven facts until states do a better job in communicating what's happening, D'Alessandro said.
“We've never had to face this trade off of the health and safety and well-being of my family versus making a livelihood," D'Alessandro said. "We're in this highly ambiguous state and that requires a lot more communication and understanding."
City National's investment leadership team maintains a cautious stance on the financial markets. The team expects a slow, non-linear economic recovery this year and heading into 2021, Galvin said.
The U.S. government's economic policy response to the pandemic has been so strong that financial conditions have eased, but they remain worse than normal, he noted.
The growth in money supply driven by Federal Reserve moves to support the economy has elevated stocks, keeping S&P 500 equities too expensive, considering that earnings are expected to keep dropping in 2021, Galvin said.
Given current market uncertainty, the team remains confident in its portfolio mix of cash and high-quality equities and bonds, Galvin said.
The portfolio managers like healthcare, select tech stocks and municipal bonds tied to high-quality states, and they see attractive income and total return opportunities in high-yield corporate bonds, he said.
A financial advisor can be a valuable partner in helping investors focus on key market data, 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.
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