U.S. coronavirus trends continue to improve generally, providing a positive backdrop for a multi-year economic recovery, City National Bank investment leaders said during their monthly market update.
With the country on pace to vaccinate more than half the population by the end of May - and with states easing restrictions and consumer sentiment improving as government stimulus checks arrive - the U.S. economy appears to be on a good trajectory, according to City National Rochdale, the bank's investment advisory organization.
Keep reading for your March 24 market and economic update.
"We have improvements occurring across the board," said Tom Galvin, City National Rochdale's chief investment officer. He pointed to several indicators — consumer spending, business sentiment, the labor market and government financial support among them — to show that a sustainable recovery from the COVID-19 pandemic is underway.
Consumer spending, which accounts for 70 percent of all U.S. economic activity, should lift corporate sales, earnings and jobs, creating a "virtuous cycle" that would lead to more spending, manufacturing and hiring, according to Galvin.
Continental Europe has struggled with efforts to vaccinate its population and contain the virus, with some areas now reinstating lockdowns, noted Ben Goetsch, City National Rochdale's senior investment strategist, citing Our World in Data.
“This is about to have a meaningful impact on the trajectory of the economic recovery," Goetsch said, citing mobility data from Apple that suggests consumer activity is faltering in France and Italy as it rises in the U.S.
The U.S. and emerging-market Asian nations remain best positioned for long-term recovery, Goetsch added.
Data from U.S. consumer surveys indicates domestic sentiment is improving, with people venturing out more and spending money as states ease pandemic restrictions.
Activity should start to return to normal in late spring as more Americans become vaccinated, Goetsch said.
"Generally speaking the news has been pretty good in the U.S.," he said.
First-quarter U.S. economic data was stronger than anticipated, driven by consumer spending and manufacturing. Consumer activity should remain a growth catalyst in 2021 and 2022 as more people receive vaccines, Goetsch said.
Nearly 75% of the highest-risk age groups have received at least one vaccine dose and nearly half are fully vaccinated, which should significantly lower U.S. coronavirus fatalities, Goetsch noted, citing data from the Centers for Disease Control and Prevention.
The downward trend for U.S. COVID-19 hospitalizations has slowed, with some areas reaching plateaus or seeing modest increases in hospitalizations, such as Michigan. But the decline should resume as vaccinations expand, Goetsch said.
Meanwhile, most states are meaningfully easing pandemic-related restrictions and should come close to seeing normal activity resume by summer, Goetsch predicted, citing data from the Oxford Policy Stringency Index.
That loosening, coupled with government stimulus payments to individuals, is driving debit- and credit-card spending and consumption across categories, he noted, citing data from Bloomberg, Opportunity Insights, Affinity Solutions and OpenTable. Pent-up demand and savings that people have accumulated from stimulus checks could propel consumer spending.
"People are even eating out and flying more," Goetsch said.
The combination of effective vaccinations, improving consumer sentiment and government fiscal support is key to City National Rochdale's outlook.
Last year's original coronavirus emergency relief package, the CARES Act, helped to boost U.S. consumer sentiment. The recent $1.9 trillion American Rescue Plan Act should do the same.
The latest package supports households through stimulus checks, expanded unemployment benefits, tax credits and other benefits, and is expected to boost income most significantly for low-income earners, Galvin said, citing Bloomberg and Congressional Budget Office data.
Lower-income households are more likely to spend the extra money, which should help lift the broader economy, he said.
The average benefit per family comes to about $6,000, although some could receive as much as $12,000, including $9,000 in cash this year, Galvin said. The U.S. government's fiscal support for the economy has been four times greater in the pandemic than during the Great Recession more than a decade ago and three times greater - and more timely - than Europe's coronavirus financial aid, he said.
The broad economic landscape reinforces City National Rochdale's recent focus on reasonably valued, high-quality U.S. and Asia emerging-market stocks, including high-dividend equities as well as high-yield bonds and alternative assets.
The investment team continues to advise clients that an "optimized" and personalized portfolio reflecting this approach, rather than the traditional 60 percent stock-40 percent investment-grade bond allocation, will help them meet long-term financial goals, albeit with more short-term volatility.
Galvin predicted the U.S. and emerging-market Asia economies will rebound better than their counterparts, based on data from the Bureau of Economic Analysis, Eurostat and the International Monetary Fund.
Focused investments in stocks from these regions can enhance returns, Galvin said, pointing to data from several market sources showing superior performance over the past five years.
While U.S. equity valuations are high, led by consumer discretionary and IT stocks, the market overall isn't excessively priced, with several sectors trading closer to their historical norms based on the forward price-to-earnings ratio, Galvin said, citing Bloomberg data.
Even with high valuations, U.S. stocks remain more attractive than investment-grade bonds, which continue to produce low yields despite the recent increase in long-term interest rates, noted Charles Luke, City National Rochdale managing director and senior portfolio manager, citing Bloomberg data.
"We have a big tailwind for continued growth and good results in 2021," Luke said.
While investors have feared long-term inflation, the outlook remains muted, likely at 2 percent to 2.5 percent, according to Luke.
“We're really not concerned in the medium term about the inflationary outlook," he said.
Inflation is expected to rise as the economy recovers, then moderate, and currently — at 1.3 percent — it remains well below the Federal Reserve's 2 percent target, Luke noted, again citing Bloomberg data.
In the fixed-income arena, City National Rochdale leaders continue to focus on high-yield bonds, which historically have performed well in economic recoveries with low-interest rate environments, as well as collateralized loan obligations and other "opportunistic" alternatives to investment-grade bonds.
Investment-grade bonds should continue to struggle with low interest rates, Luke said, citing data from various market sources.
The government's pandemic stimulus programs may require shifts in strategy to increase the likelihood that investors achieve their goals, said Rachael Crane, a City National Rochdale portfolio manager.
For example, she noted:
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The Bloomberg Barclays U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more.
Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity.
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