Woman wearing mask to fend off COVID wave

August 07, 2020

The Economy and COVID: How Many More Waves?

The U.S. economy is slowly improving. But it is still far from returning to normal as the country has yet to embrace the protocols needed to contain the lethal coronavirus pandemic, according to City National Bank's investment leaders.

The mindset and behaviors of American coworkers, family members and neighbors will determine the timeline for a return to normalcy, said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization.

“Right now we just don't have high confidence that we have a coherent, well-articulated compliance approach for dealing with COVID," he said during the investment team's weekly market update.

Absent a national strategy, the protocols set by policymakers in each state "matter a lot, and that varies widely," D'Alessandro noted. Individuals' attitudes toward wearing masks and maintaining adequate social distance from others also impacts the spread, and the country has now seen rolling negative consequences from non-compliance.

“We're concerned that if we keep rolling around these different regions that the recovery won't continue," D'Alessandro said.

The economic recovery is mixed to slightly positive, "but it's wobbly in a few areas," he noted. Keep reading for your weekly market update.

The ongoing rebound in economic activity

Tom Galvin, City National Rochdale's chief investment officer, noted that freight traffic — a key indicator — confirms an ongoing rebound in economic activity. He cited Bloomberg data showing that rail car loadings have recovered to nearly pre-pandemic levels, and said trucking surveys show similar trends.

Freight Traffice near pre-crisis levels

Manufacturing, another major gauge, also indicates a strong recovery, Galvin said. Again citing Bloomberg data, he noted that the national Purchasing Managers Index, which tracks manufacturing trends, improved in May, June and July, while regional Federal Reserve manufacturing reports showed significant improvement from April lows.

Manufacturing growth

Meanwhile, small business revenues reached a plateau in July — significantly below pre-pandemic levels — as the coronavirus surged in the U.S. South and West, and many states paused or reeled in their reopening processes, according to data from Womply and Opportunity Insights.

Galvin said he expects those revenues to pick up again by September.

Small business revenues stall

Continued Federal Support

City National Rochdale continues to see fiscal and monetary stimulus payments from the government as the economy's key driver during the ongoing crisis and expects Congress to approve another package soon — at roughly $1.5 trillion — to tide over consumers, small businesses and municipalities for the next few months, D'Alessandro said.

The economy will need more support later this year if coronavirus continues to spread, he added.

The investment team sees both encouraging and troubling health and economic trends in considering its investment strategy.

Positive Developments

On the plus side, consumer net worth has reached an all-time peak, and personal income, boosted by unemployment payments and stimulus checks, is higher than it was before the pandemic, Rochdale leaders noted.

Galvin, citing Bloomberg data, noted that personal income would be down 6 percent since February without government payments, which helped boost income by $1.5 trillion, showing that stimulus and unemployment checks are vital to keeping the economy going.

Personal Income + Government Payments

Rochdale expects gross domestic product — hit hard in the first half of the year — to improve in the second half and turn positive in 2021, assuming continued federal government stimulus support and no new major business shutdowns or COVID setbacks, Galvin said.

Tracking COVID

COVID growth rates have peaked in 87 percent of states, with transmission trends improving nationally, according to D'Alessandro. He expects high case counts, hospitalizations and fatality trends to show declines in the next three to six weeks, with fatalities peaking in a couple of weeks and slowing by late August.

Hospitalizations have started to trend downward in hot-spot states California, Florida, Arizona and Texas, while no meaningful resurgence has appeared in early-hit states like New York, he said, citing data from multiple sources.

Hospitalizations peak

While Europe and Asia have seen new cases recently, these amount to relatively modest increases in patient numbers, D'Alessandro said. Europe is handling cases well overall, although Spain's recent uptick is worth watching, he said, citing Bloomberg data.

Europe case trends

Client Portfolios

The team takes a careful approach to client portfolios and has shifted asset allocations in their efforts to maintain healthy income and returns without taking on too much risk.

The Standard & Poor's 500 Index is fully valued and near an all-time high, but the median stock is down 5 percent and portfolio managers see some good companies with reasonable valuations, D'Alessandro noted.

Investment leaders continue to maintain positions in U.S. large-cap and Asian emerging market stocks and in investment-grade bonds. Because of the high equities valuations and historically low investment-grade bond yields, however, they also like high-dividend U.S. stocks and see significant opportunities in high-yield municipal bonds and other opportunistic income investments.

HY municipals in the asset allocation decision

High-yield munis offer pockets of opportunity for active managers who know what they're doing, according to Gregory Kaplan, Rochdale's fixed income director. These bonds tend to focus on revenue rather than taxpayer backing, and the overall municipal bond default rate, excluding Puerto Rico, is far lower than the corporate default rate, he said, citing Municipal Market Analytics and Moody's data.

Industry and bond selection are key, with many sectors showing resiliency, Kaplan added.

Credit differentiation creates opportunity

Among high-yield munis, the team favors "essential" regional hospital systems, tobacco settlement bonds and select community development districts, while steering clear of certain senior living centers, alternative energy and small private colleges.

Rochdale continues to favor U.S. over European equities, as they score higher on key measures of policy, population, productivity and potential for innovation, Galvin said.

CNR Proprietary 4Ps Analysis Framework

In addition, Europe's recession is more significant and its GDP growth lags the U.S. economy, he said, citing World Bank and Bloomberg data.

European recession more significant that U.S.

Moving Forward Strategically

Rochdale's portfolio managers use strategies to minimize clients' tax burdens, including harvesting losses by selling securities that have lost value to offset capital gains taxes on those that have increased, said Rachael Crane, portfolio manager.

This year has provided good opportunities to pursue this strategy, she said.

"These are the kinds of strategies that we have already been instituting in client portfolios" and they'll become even more valuable if taxes increase under potentially new political leadership after the November elections, said Crane.

Example of importance of active tax management

Political forecasting firm PredictIt recently anticipated 54 percent odds of a Democratic sweep in November and a 59 percent chance that Democratic candidate Joe Biden will win the presidential election, D'Alessandro noted.

While it's early to count on political polls, the City National team is weighing the potential effects on markets if Democrats control the White House and Congress. Higher corporate taxes could lower earnings by as much as 10 percent, and the stock market hasn't fully accounted for that possibility yet, he said.

Higher corporate and capital gains taxes could negatively affect the stock market if Democrats take control in the election, for example, while investors might favor the likely higher infrastructure spending and multi-lateral trade approach to China, Galvin noted.

Key election issues: Democrat Proposals

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.

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 Dow Jones US Select Dividend Index includes a selection of stocks based almost entirely on dividend yield and dividend history. Stocks are also required to have an annual average daily dollar trading volume of more than $1.5 million. These criteria help to ensure that the index represents the most widely traded of the markets highest-yielding stocks. 

The Bloomberg Barclays U.S. Corporate High Yield Index covers the U.S.-dollar denominated, non-investment grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.

ICE BofAML High Yield US Emerging Markets Corporate Plus Index tracks the performance of US dollar denominated below investment grade emerging markets corporate debt publicly issued in the US domestic or eurobond market.

The ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. 

The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. 

The S&P/LSTA (Loan Syndications and Trading Association) U.S. Leveraged Loan 100 Index measures the performance of 100 large loan facilities meeting specific inclusion criteria. The index is modified market value-weighted and is fully rebalanced semi-annually. In addition, the index is reviewed weekly to reflect pay-downs and ensure that it continually maintains 100 loan facilities.

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.

The Palmer Square CLO Debt Index is designed to reflect the investable universe of US CLO mezzanine original rated A, BBB and BB debt issued after Jan 1, 2011.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% free float-adjusted market capitalization in each 21 countries. Net returns in USD.

MSCI US Index is designed to represent the performance of large and mid-cap securities in the U.S. equity market. The index covers approximately 85% free float-adjusted market capitalization of the U.S.

MSCI Europe Index is designed to represent the performance of large and mid-cap securities across European developed markets. The index covers approximately 85% free float-adjusted market capitalization of developed markets in Europe.

This presentation is for general information and education only. City National makes no representations or warranties in respect of this presentation and is not responsible for the accuracy, completeness or content of information contained in this presentation. City National is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained in or from the site. The information in this presentation should not be used to obtain credit or for any other commercial purpose nor should it be construed as tax, accounting, regulatory or legal advice. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations and you should seek professional advice from your advisor. Nothing in this presentation should be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the viewer's specific investment objectives. Any financial instrument discussed in this presentation may not be suitable for the viewer. Each viewer must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this presentation 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.

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 August 5, 2020 presentation, “Hydra Covid – How many more waves," 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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