City National Rochdale | Aug. 16, 2021

Confidence in a Multiyear Expansion

City National Bank's investment leaders remain confident in forecasting a long-term U.S. economic expansion despite current inflationary pressures and concerns over the surging coronavirus delta variant.

They continue to recommend U.S. and emerging market Asia stocks, despite high S&P 500 valuations and concerns about new domestic policies in China that could affect profits, and retain a favorable stance toward opportunistic debt, including U.S. high yield municipal bonds, given the low-interest-rate environment.

The Rochdale team believes rising inflation is a short-term condition tied to imbalances both in the labor market and the supply chain. Declining inventories show the limits of the economy's ability to meet quickly rising demand as the supply chain reopens, according to Crane.

Rochdale leaders expect U.S. capital gains taxes to rise as well next year, although it's unclear by how much. Galvin recommended investors anticipating large capital gains to talk to their financial advisors and put a plan in place to address the likely increase.

City National Bank's investment leaders remain confident in forecasting a long-term U.S. economic expansion despite current inflationary pressures and concerns over the surging coronavirus delta variant.

Healthy consumer savings and pent-up demand, lifted by government stimulus measures, should drive multiyear growth, with the economy now experiencing the early stages of that growth, the bank's investment team said during a market update Wednesday.

“We're confident in the multiyear expansion thesis despite these short-term concerns," said Tom Galvin, chief investment officer for City National Rochdale, the bank's investment advisory organization.

U.S. gross domestic product has recovered unusually quickly, already surpassing pre-pandemic levels as the labor market recovers and wages increase, the investment managers noted, citing Bloomberg data.

“It's important to step back and look at the big picture and what we see in the ultimate trajectory of the market," Senior Investment Strategist Ben Goetsch said.

The investment managers anticipate positive but relatively modest portfolio returns near-term.

ENDURING MARKET GAINS

They continue to recommend U.S. and emerging market Asia stocks, despite high S&P 500 valuations and concerns about new domestic policies in China that could affect profits, and retain a favorable stance toward opportunistic debt, including U.S. high yield municipal bonds, given the low-interest-rate environment.

Galvin cited an "extraordinary rebound" in corporate profits, citing FactSet data showing a more robust earnings surge than in earlier recoveries.



While coronavirus cases are rising as the highly contagious delta variant spreads, Rochdale leaders don't consider the resurgence a significant long-term economic issue given that vaccines are holding up extremely well, especially in preventing severe outcomes such as hospitalizations and fatalities, Goetsch said.

"As vaccination rates rise we expect the worst outcomes to be avoided," he said, citing Centers for Disease Control and Prevention and Department of Health and Human Services data showing surges focused in states with lower inoculation rates and that unvaccinated patients account for 98% of coronavirus hospitalizations since mid-July.

COVAX, the cooperative effort to distribute coronavirus vaccines around the world, expects to have enough doses to cover half the global population by year-end — up from 30% now — which should help in the fight against further virus mutations, Goetsch said.

MONITORING DELTA'S EFFECTS

So far, the current rise in coronavirus cases has caused a slight drop in time spent away from home but less so than in previous surges, Goetsch said, citing Opportunity Insights and Google data. Rochdale leaders are monitoring consumer mobility closely, however, since the economy could be affected if the delta variant causes people to stay home and spend less, he added.

Most children will return to in-person classes this fall, a major shift from widespread remote and hybrid learning a year earlier, Goetsch said, citing data from Burbio. Rochdale is keeping an eye on those trends as well, as changes could affect employment.

Consumers, who account for two-thirds of the U.S. economy, have amassed a historically high $2.5 trillion in savings, which should help fuel multiyear economic growth and a "virtuous cycle" involving more hiring, greater income, more spending, greater production, higher market wealth and greater investment, the City National Rochdale team said.

"The recovery story has everything to do with the strong consumer," said Rachael Crane, portfolio manager. As the economy reopens following pandemic shutdowns, there appears to be significant pent-up demand left, she said, citing Bloomberg data. Consumers continue to save more than normal despite higher spending this year, which should drive growth beyond 2021, she said.

This powerful consumer demand is spurring rapid hiring, although the delta variant poses a risk to the labor supply, according to Crane, who cited Bloomberg data showing a significant increase in employment since April 2021.

"We really are seeing a lot of acceleration in hiring and in fact there's such a strong demand in labor that the job openings have exceeded the unemployed," she said.

Unique pandemic issues, including labor supply and demand imbalances, have boosted average hourly earnings by 4% year over year, Crane noted, again citing Bloomberg. “What we've seen so far is that companies have been able to pass on these costs and it has not hit earnings."

The Rochdale team believes rising inflation is a short-term condition tied to imbalances both in the labor market and the supply chain. Declining inventories show the limits of the economy's ability to meet quickly rising demand as the supply chain reopens, according to Crane.

Inflationary pressures will likely remain high into 2022, then moderate when supply and demand return to equilibrium, she said. Longer term, inflation should be contained by globalization and demographic trends, she explained. Crane cited Bloomberg data showing that outliers are driving near-term inflation, which appears to be more modest when they're removed.

City National Rochdale forecasts 5.5% to 7% GDP growth in 2021 and 3.5% to 4.5% in 2022, and expects Federal Reserve interest rates to remain low both years. With corporate profits likely up an unexpectedly strong 35% to 45% this year, the team now forecasts 6% to 16% earnings growth in 2022, Galvin said, citing FactSet data.

ONGOING EQUITY RALLY

While Rochdale leaders expect the rally in U.S. equities to endure, they also anticipate more modest returns and greater volatility, saying they would view a market correction as an investing opportunity.

Galvin, noting the S&P 500's historic run, expects a correction in the 5% to 10% range, although the timing is unclear. "We would likely be more aggressive in our equities exposure because the upside at that point would likely be positive," he said.

While stocks seem fully valued, that doesn't necessarily mean they'll lose ground, Galvin said, citing the strong economy and earnings.

The team expects the U.S. corporate tax rate to increase to 23% next year from the current 21%, which would shave 4% from the earnings growth forecast. Nonetheless, they expect U.S. earnings to remain vigorous, likely up about 11% next year after a 41% post-pandemic rebound this year.

Based on normalizing consumer activity, rebuilding inventories and improving supply chains, Rochdale managers are focusing investments on financial, consumer discretionary and IT stocks, as well as healthcare and industrial equities. The team anticipates those sectors will significantly outpace the S&P 500 overall next year.

Rochdale leaders expect U.S. capital gains taxes to rise as well next year, although it's unclear by how much. Galvin recommended investors anticipating large capital gains to talk to their financial advisors and put a plan in place to address the likely increase.

The team noted that state tax revenues have now surpassed pre-pandemic levels, creating the potential for more infrastructure spending, and said new federal infrastructure spending should help extend the economic expansion.

In these turbulent times, City National encourages you to review your investment portfolio with your advisor. Get in touch with a City National advisor today to ask questions and receive help with your wealth planning needs.

Key Points:

City National Bank's investment leaders remain confident in forecasting a long-term U.S. economic expansion despite current inflationary pressures and concerns over the surging coronavirus delta variant.

They continue to recommend U.S. and emerging market Asia stocks, despite high S&P 500 valuations and concerns about new domestic policies in China that could affect profits, and retain a favorable stance toward opportunistic debt, including U.S. high yield municipal bonds, given the low-interest-rate environment.

The Rochdale team believes rising inflation is a short-term condition tied to imbalances both in the labor market and the supply chain. Declining inventories show the limits of the economy's ability to meet quickly rising demand as the supply chain reopens, according to Crane.

Rochdale leaders expect U.S. capital gains taxes to rise as well next year, although it's unclear by how much. Galvin recommended investors anticipating large capital gains to talk to their financial advisors and put a plan in place to address the likely increase.

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.

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.

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.

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.

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

Adjustments to portfolio strategies are based on guidelines set forth by City National Rochdale’s Asset Allocation Committee. Individual client allocations among strategies, asset classes, portfolio weightings may be higher or lower given differences in portfolio holdings, client imposed restrictions, and/or the customized strategy implemented by each client’s portfolio manager. These differences may have a material impact on individual client’s performance returns.

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 is available to advisory and sub-advised clients, as well as financial professionals working with City National Rochdale, a registered investment advisor and a wholly-owned subsidiary of City National Bank.

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

The S&P 500 Index is a market-capitalization-weighted index of the 500 largest publicly-traded companies in the U.S.

The Dow Jones U.S. Select Dividend Index aims to represent the U.S.’s leading stocks by dividend yield.

The Russell 2000 index measures the performance of the 2,000 smaller companies that are included in the Russell 3000 Index, which itself is made up of nearly all U.S. stocks.

The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.

The MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.

The MSCI Emerging Markets ex Asia Index captures large and mid cap representation across 17 Emerging Markets (EM) countries*. With 267 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country excluding Asia.

The Bloomberg Barclays Aggregate Bond Index is an index used by bond traders, mutual funds, and ETFs as a benchmark to measure their relative performance.

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

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.

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.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying, and lengthy lockup provisions.

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City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the August 11, 2021 presentation, “Looking Through Short-Term Concerns” 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.

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