1. What are City National Rochdale’s expectations for economic and investment outcomes over the next 12 months?

The United States, Europe, and emerging market nations are experiencing a coordinated period of expanding economies, rising corporate profits, advancing wages, moderate inflation, and low interest rates.

Though there are some indications the U.S. economy is entering the later stages of the business cycle, the domestic expansion is expected to continue at a modest pace over the next several quarters, and likely longer, provided there are no policy mistakes by the Fed (which is proceeding cautiously), or major disruptions on the geopolitical front.

While we remain moderately optimistic over U.S. and global economic prospects, investors have fully priced in this positive outlook and currently we see few compellingly attractive asset classes, whether we look at equities or fixed income. 

Consequently, we have trimmed our expected returns for growth equites over the next 12 months. On the fixed income side, given our forecast of moderately rising rates ahead, we are also trimming our projected returns for HY asset classes.

Overall, we believe economic conditions, relative valuations, and earnings growth expectations continue to support our overweight to U.S. equities and opportunistic credit, as well as our underweight to investment-grade bonds.

However, given the recent appreciation in financial markets, greater patience is warranted, and we believe investors should adjust expectations for portfolio returns over the next 12 months.

forecast expected returns

2. Is synchronized global economic growth starting to cause globally synchronized central policy tightening policies?

Yes, back in 2015 the Federal Reserve Bank began to remove stimulus and since then, a few other central banks have raised their overnight rates. Now, the European Central Bank seems to be next on the list.

The ECB announced that it will seriously consider adjusting its Asset Purchase Program (its QE) at its next meeting in October. The adjustments would go into effect in 2018.

ECB staff revised up its GDP estimate for this year from 1.9% to 2.2%. Inflation is still a concern for the ECB as it is below the ECB’s target of “near but just below 2%.” Concerns of low pricing power will be the key reason for the ECB to have a very slow path of removing accommodation.

Central Bank Rates 9/11/17

3. How will Hurricanes Harvey and Irma impact the economy?

Beyond the heartbreaking human tragedies we are witnessing right now, the impact of Hurricanes Harvey and Irma will ripple through the economic data in the coming months.

Early estimates suggest Q3 GDP growth may be reduced by 0.5- 1.0 percentage points, due to lost sales, employment, and production, along with a sharp price shock from the spike in gas prices. Still, we do not believe the impact from the storms will change the overall trajectory of the U.S. economy, which remains on a modest path of growth.

Although disruption caused by natural disasters is negative for the economy in the short term, the rebuilding period that follows will be positive.

Looking at the legacies of Sandy and Katrina, immediate negative impacts soon gave way to a rebound in retail sales, consumer spending, and construction once stores opened back up and rebuilding began.

The hurricane’s gasoline-driven inflation impact will be felt nationwide and temporarily restrain consumer spending, but using Katrina as a guide, gas prices should pull back after an initial spike and also help support 4Q growth.

US Regular Conventional Gas Price 9-11-17


4. How can Harvey and Irma be expected to impact the equity market?

History suggests equity markets can correct around 2 percent when major hurricanes impact the economy, but they tend to recover quickly.

Damages from Harvey and Irma will have a direct negative impact on several industries but these are likely to be temporary in nature, and we don’t believe most companies in our core portfolio will be materially affected, particularly over the long term.

General business activity such as hotels, restaurants, entertainment, and airlines will suffer initially in areas affected by the storms, and companies with above-average exposure could see negative impacts to their earnings in the short term.

However, several industries can be expected to benefit from the rebuilding process that will follow. For example, home improvement retailers should experience increased demand as repairs are made to homes and structures; auto makers will get a boost as cars that have been damaged are replaced.

For the energy sector, the primary impact has been to refining companies, but capacity is expected to gradually recover over the coming weeks. Production on the other hand was shut down for only a small period of time after Harvey and represented just a small portion of total U.S. output.

S & P 500


5. What effects will Harvey and Irma have on the municipal bond market?

Municipal market investors so far have had a relatively muted response to the catastrophic events of Hurricanes Harvey and Irma.  While we continue to monitor trends closely, it is unlikely these damaging storms will result in systemic disruptions to the municipal bond market.

Historical post-event credit performance underscores the resiliency of the asset class with limited occurrences of payment disruptions. While there may be isolated rating downgrades or outlook revisions, we expect most municipal issuers to maintain adequate credit quality.

Localized credit stress however could develop for those communities most affected. The multi-phase recovery process has short- to longer-term implications that will likely evolve over an extended period.  

State and federal disaster declarations provide needed support and personnel to affected areas. There is a sound history of the Congressional backing of emergency aid to help communities with immediate and longer-term responsibilities to their citizenry.

From reimbursement costs related to debris removal and critical infrastructure repairs to providing grants or loans for housing and small businesses, the role of the federal government during natural disasters is a key support mechanism for state and local governments. The availability of intergovernmental aid typically provides a buffer, if not a bridge, to public sector finances and tax bases during the recovery and rebuilding process.   

U.S. Treasury Yield Curves

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 of the date of this document and are subject to change.

There are inherent risks with equity investing. These include, but are not limited to, stock market, manager, or investment style risks. 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, and 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.

There are inherent risks with fixed income investing. These may include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond risks. When interest rates rise, bond prices fall.  This risk is heightened with investments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.

Investments in below-investment-grade debt securities, which are usually called “high-yield” or “junk” bonds, are typically in weaker financial health, and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities.  While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

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

Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases, and changes in the credit ratings.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more-developed foreign markets.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal.

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

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.