Unless lawmakers pass another stimulus package soon, consumer spending and the U.S. economic recovery will likely slow in coming weeks, according to City National Bank's investment leaders, who consider fiscal and monetary support from the government vital until a coronavirus vaccine becomes available — or at least through year end.
"Clearly, consumer confidence is struggling to recover," said Tom Galvin, chief investment officer for City National Rochdale, the bank's investment advisory organization. "Spending by consumers is constrained," he said, citing Conference Board data showing declining expectations.
Consumers are concerned about the coronavirus, high unemployment and uncertain back-to-school conditions resulting from the lethal pandemic, Galvin noted. Initial jobless claims remain over 1 million and continuing claims may remain high for some time, he said, citing St. Louis Federal Reserve data.
Keep reading for your weekly market update from Wednesday, August 2.
City National Rochdale CEO Garett D'Alessandro noted that unemployment remains high at 16.3 million, although the country recently added back 1.76 million jobs. With the stimulus package hitting delays in Washington, temporary layoffs are turning into permanent layoffs in certain industries, including airlines and hotels, he said, citing the data below.
Expanded unemployment benefits and business support provided under the emergency CARES Act boosted household incomes and fueled spending earlier in the crisis, but the lack of a new stimulus package will likely dampen activity, Galvin said.
Overall, City National's investment leaders painted a mixed picture on the economy, markets and efforts to fight the pandemic.
While consumers are showing caution, demand for cars, trucks and housing is strong, they said. With some exceptions, durable goods shipments are rebounding, and computer product shipments are stable as companies need extra equipment for remote work, Galvin said, citing U.S. Census Bureau data.
The Rochdale team continues to expect a strong rebound in U.S. gross domestic product in the second half of this year and for corporate earnings to rebound by 20 percent to 40 percent in 2021.
Citing covidtracking.com statistics, D'Alessandro noted that coronavirus cases, hospitalizations and fatalities are declining nationally and said those trends should continue.
Twelve states qualified as "red zones" with worsening case numbers in late July, while eight states fell into that category as of late August, he said, citing data from covid19-projections.com, which also forecasts fewer fatalities through year end.
D'Alessandro, however, doesn't expect any states to be able to fully reopen before late October.
D'Alessandro noted that Abbott Laboratories has released an inexpensive, sensitive coronavirus diagnostic test that produces results in 15 minutes for back-to-school and back-to-work screening, with the company expecting to manufacture 50 million units by late October.
While the tests aren't perfect — and there's a greater chance of false negatives than with more thorough tests — "these are good, short-term, quick-response tests," he said.
Meanwhile, some vaccine development endeavors have entered Phase 3 trials, with results likely starting to appear in November or December, D'Alessandro said.
Despite the uncertain economic and health environment, financial markets are performing well, with the S&P 500 up nearly 10 percent as of the end of August, rebounding from a sharp pandemic selloff months ago, and the investment-grade bond index returning 6.6 percent through last month, D'Alessandro said.
The team considers stock valuations high but said that timing a correction is difficult.
The Federal Reserve's more flexible approach in adopting a 2 percent average inflation target should result in low interest rates for the next two to four years, which is good for businesses and consumers but not for investors seeking good returns from investment-grade bonds, he said.
City National Rochdale aims to balance its portfolios for growth and risk management, D'Alessandro noted. The investment team currently likes high-dividend stocks, high-yield bonds, U.S. large-cap equities, emerging-market Asia stocks and certain alternative investments and is maintaining a cash buffer.
The team also cited independent political polling data showing a significant lead for Democratic presidential candidate Joe Biden and discussed strategies that investors might consider to prepare for possible policy changes.
Jeffay Chang, City National Bank trust advisor, noted that regulations governing itemized deductions could change significantly. Although there are no clear answers yet on what may happen, he recommended that investors speak with their financial professionals about the possibilities and about how they might benefit from taking certain steps today, such as accelerating their income and stepping up charitable contributions this year.
Under the CARES Act, taxpayers can deduct 100 percent of charitable donations this year, Chang noted. Should Biden become president and implement his tax proposals, investors might also explore various moves for 2021 and beyond, including maximizing retirement-plan and pre-tax flexible-spending-account contributions and refinancing mortgages greater than $750,000, he said.
Portfolio Manager Rachael Crane cautioned investors against acting on behavioral biases that can cause them to react to short-term news and conditions and stray from their long-term financial goals.
A loss-aversion bias, for example, may prompt investors to sell good stocks in a volatile market and miss a rebound, while a hindsight bias may lead to excessive risk-taking based on past performance, she said.
Crane recommended “working with your advisor to correct for your own faulty decisions" and sticking with your goals to "increase the likelihood of reaching your long-term goals."
In this election season and always, City National Bank and its investment advisory organization, City National Rochdale, remain committed to delivering objective, non-partisan market analysis and investment guidance, with the goal of helping our clients make informed financial decisions.
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 Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.
The Pease limitation, named after the late U.S. Rep. Donald J. Pease from Ohio, capped the value of itemized deductions for taxpayers. Depending on a taxpayer's filing status, the caps apply to those with annual adjusted gross income (AGI) of more than $156,900 to more than $313,800
Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account.
The Tax Cuts and Jobs Act ("TCJA") changed deductions, depreciation, expensing, tax credits and other tax items that affect businesses.
The SALT (state and local tax) deduction cap was introduced as part of the Tax Cuts and Jobs Act as a means to broaden the individual income tax base and partially fund reductions in statutory tax rates, including a reduction in the top rate.
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