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May 08, 2020

Start Your Engines: U.S. Enters Reopening Phase​

Expressing optimism about the economy's gradual recovery prospects, City National Bank's investment team told clients the United States is moving away from severe coronavirus shutdown status and toward a "middle ground," with greater, albeit limited, business and social activity.

“This middle zone is where we're going to be living our lives for an extended period of time – months and months and months," said Garrett D'Alessandro, CEO of City National Rochdale, the bank's investment advisory organization, during the bank's weekly market update on Wednesday.

“We're not going to Madison Square Garden or Dodger Stadium for a long time."

While hard-hit New York City remains at home, most regions of New York state, along with other key states, are preparing to reopen in phases soon.

The reopening phase will feature various precautions, appropriate virus testing and containment practices.

Moving to a Middle Ground

The team likened the current moment to the "start your engines" point in an auto race.

"This is not going to be 100 cars going at once," but rather two at a time, D"Alessandro said.

What does this mean for the financial markets?

The team maintains a conservative stance focused on preserving capital and raising cash, City National Rochdale Chief Investment Officer Tom Galvin said.

"We are going to operate our investment strategy on a cautious note" while remaining somewhat positive, added D'Alessandro.

Even some of the best-run companies have suspended earnings guidance for now given uncertainties surrounding the pandemic crisis, which "supports our overall defensive posture and keeping a little dry powder in cash," Galvin noted.

Assuming authorities handle coronavirus testing, tracing, tracking and isolation protocols well, the investment team doesn't expect a big "second wave" surge in cases that would return the country to shutdown status later this year.

Although, new infections and fatalities are expected to appear, D'Alessandro explained.

The team, however, continues to view equities as overvalued, with the stock market looking too far ahead into a 2021 recovery when fundamentals aren't there yet.

Other Optimistic Findings

Besides states' moving toward gradual reopening, D'Alessandro cited more positive developments from recent days, including:

  • Federal Support. The Fed and elected officials "have been working in a coherent, collaborative, converging way" to get money to workers and small businesses hurt by the shutdown, he said. "They've done a very good job," and have a bit more work to do, he added.

  • A better forecast. Evidence that U.S. coronavirus mortality won't be as severe as previously forecast, which D'Alessandro attributed to the success of the shutdown.

  • A glimmer of hope. Signs that U.S. corporate earnings may not be as bad as feared, although significant uncertainty remains. Roughly 40 percent of companies report little confidence in their own earnings guidance now, he noted, adding that City National's investment committee is "very nimble" in selecting attractive stocks and bonds for agile, resilient companies.
earnings uncertainty remains high

Still, Proceeding with Caution

Tom Porcelli , managing director and chief U.S. economist for RBC Capital Markets, part of City National Bank's parent firm Royal Bank of Canada, cautioned that the reopening process is fragile.

Consumer fears about dying from the coronavirus, for example, will play a major role in how the reopening process unfolds.

“If we want to put back lost output, people are going to have to engage in the reopening," he said.

States will reopen gradually with relatively low-risk industries, while businesses and places where physical distancing are difficult will wait until later, D'Alessandro said, citing Goldman Sachs research. Meanwhile, U.S. testing is increasing, and states with fewer cases won't need as much testing, he added.

The Importance of Consumer Psychology

Reopening businesses, however, won't necessarily translate into economic strengthening if individuals aren't comfortable venturing into stores or offices.

how are states reopening

“We're at a fragile point in the reopening process, which says a lot since we just literally started the reopening process," RBC Capital Markets chief economist Porcelli said.

"What we're really trying to capture is how does the consumer feel about the reopening?"

On one hand, a Harris Poll tracking sentiment about the pandemic shows about 40 percent of people want to get back to regular activity within three months of the virus curve flattening, which Porcelli called "a strikingly high number."

The percentages increase significantly with more time, he added.

There's a "push-pull," however, as 51 percent of those polled fear dying if they catch the virus, also a strikingly high number, Porcelli said.

If cases start to rise again as states reopen, “I think that puts people in a really tough spot" in terms of their feelings about reopening, he said.

A Rocky Road Ahead for 2020

RBC expects the economy won't get back all the output lost from the pandemic until at least late 2021 or early 2022.

Unemployment could easily hit 20 percent this year, with the country possibly trimming that number to 10 percent by year end, according to Porcelli.

"All of these jobs will not come flooding back as soon as social distancing eases," he said.

City National continues to consider U.S. stocks and bonds the best places to invest, Galvin noted, citing what he called the U.S. government's superior economic response to the pandemic and a more difficult earnings environment overseas.

U.S. healthcare companies and tech firms that support remote work are particularly attractive, he 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 6, 2020 presentation, “Start Your Engines," is reprinted by permission from City National Rochdale.

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