Surging coronavirus cases and hospitalizations across the country will likely slow rather than delay the U.S. economic recovery, according to City National Bank's investment leaders, who noted that equity markets nonetheless continue to climb as investors look past the troubling pandemic trends.
Despite the "very concerning" waves of new hospitalizations and cases in the U.S. South and West, the stock market has risen about 5 percent this month, Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization, said Wednesday on the team's weekly market update.
“The market is essentially taking this entire COVID situation, putting it in a box and putting it on a shelf," and assuming that a year from now, the economy will largely have moved past this event, he said.
Most U.S. states north of 40 degrees latitude are gradually reopening and gaining jobs, while states to the south and west are slowing or pausing their recovery, D'Alessandro said.
“It's not a reversal of the recovery for the United States but it is a slowing in some segments," he said.
"We do think this pause pushes down unemployment gains," he continued, "and pushes up small business bankruptcies" in the months ahead, pushing out the full economic recovery from late 2021 to 2022.
The Rochdale team hasn't materially changed its projection that every month going forward, the economy will gain jobs and grow, he said. The forecast for the recovery rate is “ticking down, but it is still a positive rate."
The firm expects equities to be higher a year from now - although not by much - and that interest rates will remain very low for several years.
For financial markets, economic positives outweigh coronavirus negatives, even with significant pressures like loan defaults and high joblessness, D'Alessandro said, citing Bloomberg data.
Positives include lower-than-expected unemployment, higher-than-anticipated retail sales gains, rapid recovery in the manufacturing and services sectors, and the trillions of dollars in economic stimulus from central banks and lawmakers in the U.S. and Europe to support individuals, small businesses and municipalities during the pandemic, he noted.
Financial markets are relying so strongly on governments and central banks to continue supporting the economy via large stimulus packages that even a whisper of a pullback "would be far worse (for markets) than some news on the spread in our opinion," D'Alessandro said.
On the negative side, hospital capacity is being severely tested in some places as the virus spikes, and state governments are closing restaurants and bars and pausing their reopening processes.
The market believes several factors, including broader adoption of social distancing protocols, improved treatments and an eventual COVID-19 vaccine, will lead the country out of the health crisis within a year, D'Alessandro said, adding that a vaccine isn't likely before 2021. "Some states are learning the hard way" that masks and social distancing are necessary to contain the lethal pandemic, D'Alessandro said.
“If you really want to get this thing stopped you have to put mandatory measures in place," he said, noting that science and experience in other developed countries show governments must take four steps — requiring masks, conducting widespread testing and tracing, and isolating those testing positive — to contain the spread.
Hospitalizations have significantly worsened in several states, notably Texas, Florida, California and Arizona, while significantly improving in New York, D'Alessandro said, citing data from the COVID Tracking Project, state health departments and covidactnow.org.
Texas, California and Arizona hospitalizations should peak sometime in August, then follow a downward trajectory similar to New York's, while it's too soon to say the same for Florida, he said, citing the same data sources.
Health outcomes appear to have improved since the spring for those hospitalized with coronavirus, as the hospital fatality rate has declined from 3 percent to 1.5 percent, D'Alessandro said, citing COVID Tracking Project and covidactnow.org data.
As cases surged this month, consumer sentiment, which had been recovering, reversed to previous lows, he said, citing University of Michigan Consumer Sentiment Index data provided by Bloomberg.
After fast job gains last month as states reopened, hiring has slowed this month as the virus spread, he noted, citing Bloomberg and Homebase data. “We really do want to see this remain flat, we don't want it to reverse," he said.
Meanwhile, the U.S. economy needs another $2 trillion in stimulus this month as emergency programs start to expire, said Tom Galvin, City National Rochdale's chief investment officer.
The team expects the government to approve another $1 trillion to $2 trillion in stimulus funds, he said.
A solid fiscal package would boost consumer sentiment and help small businesses stay afloat during shutdowns rather than enduring the damaging process of reopening and having to close amid a virus spike, Galvin said.
It also would likely help minimize a second round of layoffs, he added.
Consumer spending and further economic stimulus and unemployment payments are key to determining the economic forecast, and are interrelated, Galvin said.
“Extensions are needed, clearly," he said. “For the consumer, the greater the dollar amount the better the benefit."
Corporate earnings appear to have bottomed in the second quarter, with several companies that have reported second-quarter results moderately exceeding consensus estimates. Galvin cautioned, however, that earnings season isn't over and some companies are likely to post ugly results.
He presented FactSet data showing that Wall Street analysts expect earnings to significantly improve next year.
City National Rochdale is carefully approaching pandemic-related pharmaceutical investments, avoiding attempts to pick a vaccine "winner" or an early-stage experimental treatment, and steering clear of overly valued healthcare stocks, Galvin said.
Instead, the team likes high-quality companies that support those working to develop vaccines, firms that have successfully developed COVID tests and those that will support vaccine manufacture.
Preferred healthcare companies include Charles River Laboratories and Thermo Fisher Scientific, Galvin said.
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 University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan; it is derived from a survey of consumers.
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