Matthew PeronChief Investment Officer, Senior Managing Director | Dec. 20, 2018

Still in the Realm of a Normal Correction

The Fed is looking at the real economy, not the market, and believes that the market may be overreacting to the slowdown.

We agree with the Fed and do not see a recession in the near term.

We believe the market needs to adjust to this new regime, and our positioning considers this.

We have been underweight non-U.S. markets, which have taken the brunt of the damage this year.

Equity markets sold off, as recent commentary by Federal Reserve Chairman Jerome Powell and expectations for two hikes did little to address the fears the market has, namely that the Fed will make a policy mistake by raising rates too much, further invert the yield curve, and trigger a recession.

The Fed is looking at the real economy, not the market. It believes that, like in 2015-16 (and 1986 and 1998), the market may be overreacting to the slowdown.

We agree with the Fed. While some indicators are slowing, we do not see recession in the near term, which is what would cause us to pare back equity exposure even further. When the market’s multiple declined by an amount like we’ve just seen (19%), in 15 out of 20 instances it recovered in the next year. Most of our economic indicators (the City National Rochdale SpeedometersSM) are green, especially those relating to the consumer, and we expect them to stay that way for some time. However, we believe the market needs to adjust further to this new regime, so we do not see this as a place to add to risk just yet.

Importantly, our positioning considers this with a significant allocation to High Dividend and Income equity, which tends to do well in a slowing economy and lower rate backdrop. In addition, our Large Cap Core equity positioning has a high quality bias and is outperforming. We have been underweight non-U.S. markets, which have taken the brunt of the damage this year.

As a result, we counsel staying the course. Please reach out if we can be of any assistance.

Key Points

The Fed is looking at the real economy, not the market, and believes that the market may be overreacting to the slowdown.

We agree with the Fed and do not see a recession in the near term.

We believe the market needs to adjust to this new regime, and our positioning considers this.

We have been underweight non-U.S. markets, which have taken the brunt of the damage this year.

Index Definitions

The Standard & 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.

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

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.

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results.

Investment management services provided by City National Bank through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor.

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