quarterly-update-oct-2015-header

THIS ISSUE

From the Desk of
GARRETT D’ALESSANDRO, CFA, CAIA, AIF®

As part of City National Rochdale’s asset allocation process, we develop various scenarios based on our expectations regarding corporate profits, interest rates, employment, consumer spending, the overall economic cycle, geopolitical developments, and other factors that can influence returns and risks for each asset class in which we invest. From these scenarios, we create our base case, which we usually assign a 65.0% to 75.0% probability, along with a more optimistic and a more pessimistic forecast. Our current base-case scenario (65.0% probability) for the next two to three quarters includes the following:

  • U.S. GDP growing about 2.0% (annualized)
  • Moderate job growth
  • Reasonable growth in consumer spending (about 2.0%)
  • Slow corporate profit growth (about 4.0%)
  • Continued low interest rates (10-year Treasuries yielding 1.5% to 2.0%)
  • No major geopolitical event that would create significant sustained retrenchment by business or consumers
  • Lower than average returns for equities and bonds
  • Continued sub-par growth in Europe, but no recession

Our more optimistic scenario (15.0% probability) calls for slightly better growth in GDP, jobs, and consumer spending. Our more pessimistic scenario (20.0% probability) envisions lower growth in these three areas.

Our current asset allocation in client portfolios is predicated on the base case. However, we remain flexible, ready to alter our equity and bond allocations as warranted. Here are some events that would lead us to modify our portfolio positioning:

  • A meaningful increase in interest rates (above 2.25% on the 10-year Treasury) within the next two to three quarters
  • The risk of a U.S. recession in 2017 exceeding 35.0% (our current forecast)
  • A victory by Donald Trump becoming likely

The U.S. economy remains in an extended slow recovery. While time does not determine when a recovery ends, history shows that as economic expansions continue, there is an increased likelihood of unsustainable spending by consumers, and sometimes by businesses. This sows the seeds for the next downturn. Currently, there are no meaningful sectors relating to consumers or businesses that appear to have reached unsustainable levels.

As the final quarter of 2016 unfolds, we will be keeping a close eye on corporate profits, the Federal Reserve System, and especially the election. While we have confidence in our economic models and financial indicators, we also know that polling data is suspect – as the citizens of the United Kingdom learned earlier this year. Stay tuned.

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 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, 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.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. 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. 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 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 securitiesof a higher-quality rating.

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. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. 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.

An investor should consider carefully the fund’s investment objectives, risks, charges and expenses. The Fund’s summary and full prospectus contains this and other important information about the investment company, and it may be obtained by calling 800-245-9888. Please read it carefully before investing.

City National Rochdale Funds are distributed by SEI Investments Distribution Co., which is not affiliated with City National Bank or any subsidiary or affiliate.

No investment strategy can guarantee a profit or protect against loss in periods of declining values. There is no guarantee that the Fund’s income will be exempt from federal or state income taxes. Capital gains, if any, are subject to capital gains tax. Income from municipal bonds may be subject to the alternative minimum tax. Diversification does not protect against market loss.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.

Index Definitions

The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.

The U.S. Treasury 10-year note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

The Barclays U.S. Corporate High-Yield Index covers the U.S.-dollar-denominated, non-investment-grade, fixed-rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch, and S&P of Ba1/BB+/BB+ or below.

The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency emerging markets debt benchmark that includes fixed- and floating-rate U.S. -dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.

MSCI EM Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.

MSCI EM Asia Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.

The MSCI EM EMEA (Europe, Middle East, and Africa) Index is a free-float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of Europe, the Middle East, & Africa. The MSCI EM EMEA Index consists of the following 10 emerging market country indexes: Czech Republic, Greece, Hungary, Poland, Russia, Turkey, Egypt, South Africa, Qatar, and United Arab Emirates.

The MSCI Emerging Markets Latin America Index is a free-float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The MSCI EM Latin America Index consists of the following five emerging market country indexes: Brazil, Chile, Colombia, Mexico, and Peru.

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

Non-deposit Investment Products: are not FDIC insured, are not Bank guaranteed, and may lose value.