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May 28, 2020

Thinking About Getting Back to Work

Commentary provided by City National Rochdale, May 26, 2020

As states take steps to emerge from the nation’s extended business shutdown, recent data indicate promising trends in COVID-19 virus spread and testing, City National Bank’s investment team said this week. Nevertheless, the bank’s investment leaders expect the U.S. economy to hit bottom in June or July, followed by a gradual recovery that could take up to two years. Though “the wheels of commerce are being reengaged” as states resume activity, unemployment remains a major strain, Tom Galvin, chief investment officer of City National Rochdale, the bank’s investment advisory organization, told clients during the team’s recent market update. “We think it’s prudent to continue to maintain the conservative posture that we have taken,” Galvin said.

REOPENING THE ECONOMY, STATE BY STATE

City National Rochdale CEO Garrett D’Alessandro noted that all states have taken at least the initial steps to reopen their economies and cited several encouraging signs in states’ efforts to contain the lethal pandemic and to resume activity. Data from states that were the first to lift restrictions indicate “no meaningful second wave” of the lethal virus so far. Meanwhile, no other country has experienced an unmanageable virus resurgence either, he said. The pace of testing has more than doubled across the country over the past month, with big cities making testing more widely available. Positive result rates have fallen to 6 percent nationally in the last week, according to D’Alessandro, who cited data from The COVID Tracking Project.

Six major states – Georgia, Colorado, Texas, Tennessee, Florida and hard-hit New York – now report positive coronavirus test rates under 10 percent, he said, also citing the COVID Tracking Project.

In addition, new infections have declined in every state, according to D’Alessandro, who cited recent data from covid19-projections.com. “Everyone should be pleased with the progression over the last two or three weeks,” he said, noting data from the Institute for Health Metrics and Evaluation (IHME), which shows numerous states with adequate hospital capacity.

FAULTY TIMELINES

The City National team believes overconfidence is driving expectations that a coronavirus vaccine will appear this year. D’Alessandro said he anticipates a vaccine is more likely to materialize in 2021, despite recent news indicating some progress.

PREPARE FOR LONG-TERM RECOVERY

As for the economy, the bank’s investment team continues to see “a very negative situation in unemployment,” with a bottom likely in June or July followed by a modest, long-term recovery, D’Alessandro said. “It won’t be a resurgence of 20 million jobs within a couple of months,” he added. Lower-skilled, low-wage workers who can’t work remotely are bearing the brunt of the economic hit from the pandemic, D’Alessandro said, noting that 39 percent of U.S. workers with household income under $40,000 lost their jobs in March. Unemployment benefits under the CARES Act, the new federal law passed to support individuals and businesses during the pandemic, can replace most or all lost income for many unemployed Americans at least through July, he said, citing Bureau of Labor Statistics and data from the Center on Budget and Policy Priorities.

TIME FOR MORE GOVERNMENT AID

Despite the significant financial support, more than half of the unemployment payments did not arrive to recipients on time. States struggled to process high claim volumes and expanded benefits in April, D’Alessandro said, citing Brookings Institution information. This backlog, along with sudden layoffs in April, created an immediate cash crunch for many. In fact, 36 percent of unemployed and underemployed households were unable to pay all of their bills, D’Alessandro said, citing Fed data. Still, most renters managed to pay their April and May rent, he said, citing the National Multifamily Housing Council. Additional government aid or a faster economic reopening will be needed after July, when enhanced unemployment benefits provided through the CARES Act will expire, D’Alessandro added. Many of those laid off could go back to their jobs, leading to a faster recovery. However, states must continue the reopening process for this to happen, he said, citing evidence that workers are gradually returning to jobs as states lift restrictions. The team expects the U.S. government to again bolster individuals and businesses by approving another $1 trillion to $2 trillion soon.

AN OVERVALUED STOCK MARKET

Even with a recovery, City National’s investment leaders estimate that unemployment, which could peak at 20 percent or higher this year, will remain significant next year, perhaps falling to six percent or seven percent by year-end 2021. “This is going to be a long steady progression down in the unemployment rate,” D’Alessandro said. City National Rochdale continues to focus on high-quality U.S. growth stocks and high-yield bonds while setting aside cash to take advantage of market opportunities. They like healthcare stocks and tech companies that support remote work and commerce. The team expects another stock market pullback during the pandemic, and they project that investment-grade bond yields will stay low for at least two years. In the current low-interest rate environment, investors with a higher risk tolerance might consider high-dividend stocks to boost income and provide healthy total returns, CIO Galvin said. These stocks are likely to provide more attractive yields than investment-grade bonds while interest rates remain low and during the recovery, he noted, citing Bloomberg data that shows how high-dividend stocks have significantly outperformed investment-grade bonds over time.

The team is positioning portfolios to achieve near- and long-term goals, focusing on income-producing securities in the short-term, a mix of income-producing securities and U.S. growth stocks in the medium term, and growth stocks entirely for timeframes beyond 10 years. D’Alessandro said the stock market, which the team considers overvalued, appears to be treating the pandemic as a natural disaster, placing it in a capsule and not putting much weight on it.

In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals to help with your wealth planning needs.

Important Disclosures

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly-owned subsidiary of City National Bank.

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.

Diversification does not ensure a profit or protect against a loss in a declining market.

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

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

Standard & Poor’s 500 Index is a widely recognized unmanaged index including a representative sample of 500 leading companies in leading sectors of the U.S. economy and is not available for purchase. Although the Standard & Poor’s 500 Index focuses on the large-cap segment of the market, with approximately 80% coverage of U.S. equities, it is also considered a proxy for the total market.

The Bloomberg Barclays US Intermediate Corporate Bond Index measures the investment grade, fixed rate, taxable corporate bond market whose maturity ranges between 1 to 9.9999 years. It includes USD denominated securities publicly issued by US and non US industrial, utility and financial issuers.

The S&P High Yield Dividend Aristocrats Index is designed to measure the performance of the 50 highest dividend yielding S&P Composite 1500 constituents which have followed a managed dividends policy of consistently increasing dividends every year for at least 20 years.

This presentation is for general information and education only. City National makes no representations or warranties in respect of this presentation and is not responsible for the accuracy, completeness or content of information contained in this presentation. City National is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained in or from the site. The information in this presentation should not be used to obtain credit or for any other commercial purpose nor should it be construed as tax, accounting, regulatory or legal advice. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations and you should seek professional advice from your advisor. Nothing in this presentation should be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the viewer’s specific investment objectives. Any financial instrument discussed in this presentation may not be suitable for the viewer. Each viewer must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this presentation 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.

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 May 20, 2020 presentation, “Thinking About Getting Back to Work,” 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. For more information visit: cnr.com.

 

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