Wealth Planner Speaks to Family

March 26, 2021

Recovery Ahead for U.S. Economy in 2021

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.

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Improving Outlook

"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.

Easing Pandemic Restrictions and Trends

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.

Government Fiscal Support

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.

Adjusting Portfolios

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:

  • With state and federal taxes likely to rise, investors can develop strategies to mitigate the effects by harvesting capital losses and realizing gains by selling high-priced growth stocks and rebalancing into less expensive equities.
  • While inflation should remain modest for the next decade, costs for certain items such as college tuition, medical care and housing will likely increase at significantly higher rates, based on Bloomberg and Bureau of Labor Statistics data.
  • Investment-grade yields should stay in the 1 percent to 2 percent range for a while, so investors hoping to achieve higher returns may need to consider alternative assets that bring more short-term volatility.

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.

You also are encouraged to keep up-to-date with the latest economic perspectives and shifting global markets during the pandemic by signing up for City National Bank's newsletters here. Delivered biweekly, straight to your inbox.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

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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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 March 24, 2021 presentation, "Brighter Days Ahead" 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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