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May 15, 2020

Perception vs. Reality

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.

Recent key developments

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.

  • States Reopening, Testing. Thirty-one states have entered their first or second reopening phase. “We're gauging for each of those 31 states' issues, like testing, tracing, new cases, and - while none of those 31 states have zero new cases or zero deaths - so far the issues related to the coronavirus are manageable by the standards set and defined by that particular state," D'Alessandro said.

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.

  • Growing Job Losses. Unemployment continues to mount, reaching "unimaginable magnitudes" that significantly exceed the Great Depression, D'Alessandro said. The investment team believes unemployment-claims statistics don't capture all the workers who have lost jobs because of the pandemic.

“We estimate that 35 million people have no visible means of job income," an unprecedented situation for the U.S. economy, he said.

  • Stocks Overvalued. U.S. stocks recently traded down 11 percent year-to-date, which indicates equity markets are "looking through the entire episode of this coronavirus" and writing it off, despite the "extremely bad economic consequences," D'Alessandro 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.

U.S. and Emerging Asia Have Outperformed

Moving forward, the media plays a pivotal role

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.

Looking back on shelter-in-place regulations

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.

How can we make sense of all these numbers

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.

Are states reopening too soon

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.

Where do we see potential issues

Leaning on data to reopen the economy

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."

On the road to economic recovery

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.

Stocks continue to be expensive

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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City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the May 13, 2020 presentation, “Perception vs. Reality," 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.