As the second quarter ended, financial markets continued to struggle with many of the same issues that have dogged them for a while now.

Namely:

>    Are the economic problems in Greece likely to spill over into a larger European financial crisis?
>    When will the Fed begin raising interest rates, and what will be the impact on global asset prices?
>    Is the U.S. economy ready to finally break out of its sluggish growth pattern of the last six years?
>    Can China effectively manage a sharp slowdown in growth?

In the face of these persistent worries, financial markets struggled to post gains in the second quarter. The good news is that despite these and other nagging concerns, the S&P 500 still finished the quarter within 4% of its all-time high set in May. Prices of fixed income securities fell modestly, as the yield on the bellwether 10-year U.S. Treasury note rose from 1.92% to 2.35% at the end of the quarter. Other interest-sensitive sectors followed suit, as utility stocks fell 5.8% in the quarter and real estate investment trusts (REITs) tumbled 8.9%.

Overseas, European stocks retraced most of their earlier-year gains and finished the first half of the year up 5% (in USD). The Japanese equity market rallied 14.4% (in USD) in the first half of the year. Japan benefitted from aggressive monetary stimulus from its central bank, while Europe’s advances were negated by concern over a Greek debt default.

How important are each of these issues in shaping financial market performance for the remainder of the year? While any outcome in Greece is likely to inflict significant economic pain on Greek citizens (especially if they exit the Eurozone), the impact on global financial markets is expected to be manageable. European countries have been preparing contingency plans for a so-called “Grexit” for years now and are thought to be in much better shape than they were during the country’s last bailout in 2011. So beyond some near-term volatility (most prominently in Europe), we do not expect any lasting impact on financial markets from the Greek saga.

Of larger concern to U.S. investors is the Fed’s desire to “normalize” interest rates, which means raising the Fed funds rate from near zero to somewhere around 3.5% over the next few years. The Fed is attempting to walk a fine line by slowly tightening the monetary dials on the economy (to head off future inflation and provide some ammunition for the next downturn) without jeopardizing the slow but steady progress of the U.S. economy of the last six years. Investors are scrutinizing every utterance from Fed officials as to how this might play out. Our view is that the Fed’s stated intention of a slow, gradual approach is not likely to disrupt financial markets for the time being. However, this may become more of an issue in 2016.

The pace of U.S. economic growth, accompanied by falling unemployment and rising inflation, will be one of the keys to the Fed’s chosen course for raising interest rates. While many Americans have been frustrated by the modest pace of job growth and wage gains over the last several years, this sluggish growth created a great backdrop for asset prices. Interest rates have remained low and corporate profit margins are at all-time highs, driving U.S. stocks up by more than 200% since 2009 (as represented by the S&P 500 Index). The modest growth rate has limited the excesses that normally accompany years of expansion, and which in turn sow the seeds for the next downturn. We see no evidence of an impending recession on the horizon, and expect this pattern to continue for the foreseeable future.

China could be the wild card. Opinions about the underlying strength of the Chinese economy are all over the board, and China’s outsized influence on the global economy has the potential to tip the scales in either direction. Chinese stocks have been on a wild ride this year, despite decelerating economic growth. We believe investors should maintain exposure to China, but avoid stocks with sky-high valuations and exaggerated growth prospects.

With most asset classes marking time in the second quarter, we believe the opportunities look much better for the second half of 2015.

City National Rochdale, LLC is a Registered Investment Advisor and wholly owned subsidiary of City National Bank.

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Important Disclosures 

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. 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.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

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The yields and market values of municipal securities may be more aff ected by changes in tax rates and policies than similar income-bearing taxable securi-ties. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.

Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

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.

Core Personal Consumption Expenditures Price Index (core PCE) is the personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

Shanghai Composite Index (SHCOMP): A capitalization-weighted index. Th e index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

Shenzhen Composite Index (SZCOMP): An actual market-cap weighted index (no free float factor) that tracks the stock performance of all the A-share and B-share lists on Shenzhen Stock Exchange.

MSCI China Index (MXCN): A free-fl oat weighted equity index. It captures large and mid-cap representation across China H shares, B shares, Red chips and P chips.

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