CIO Tom Galvin on Bloomberg's "The Close"
Higher for Longer: Adapting to a New Era
Summary of June 30 Mid-Year Market Update Webinar
Forecasts and financial strategies are being updated by economists and investment experts in light of ongoing challenges to the U.S. and global economies. Tom Galvin, chief investment officer for City National Rochdale, described this as the “era of higher for longer" in a special bulletin announcement ahead of the monthly investment webinar from City National Rochdale.
During our mid-year market update, managers from Rochdale focused on investor concerns given the potential for a recession, continued inflation and the fact that global financial markets have one of the worst yearly starts on record.
“Inflation will be higher for longer than we anticipated, interest rates will be higher for longer, geopolitical tensions and uncertainty will be higher for longer and high volatility in the economy and financial markets will be higher for longer," said Galvin.
Still, Galvin said the U.S. economy is fundamentally strong, especially compared to the rest of the world. That strength is anticipated to provide the economy with some resilience against increasing headwinds.
A number of developments in recent weeks led City National Rochdale to update their outlook, including dramatic declines in recent consumer and business confidence surveys. Inflation levels are not expected to begin moderating now until the first half of 2023, which will impact real income and slow spending, said Galvin. The persistency of inflation is also increasing the difficulty of the Fed achieving a soft landing and raising the possibility of a policy mistake, at the same time the risk of extreme scenario outcomes with the Ukraine crisis are rising.
Rochdale's updated economic forecasts include:
-Lowered base case GDP growth range forecasts to 1.5-2.5% for 2022 and 0-1% for 2023.
- Increased inflation rate estimates to a range of 7% to 8% in 2022 and 3% to 4% in 2023.
- Reduced S&P 500 growth estimates to 3-8% in 2022 instead of 5-11% and earnings per share to $220; 2023 base case estimate calls for 0-8% growth and $232 per share earnings, but given the uncertainty around the outlook the overall forecast range is an unusually wide.
- An anticipated federal funds rate increase to 3.25-3.5% in 2022 and to 3.25-4% in 2023, depending on depend on incoming data and whether or not the Fed sees indications inflation is starting to moderate.
- An increase of 10-year Treasuries to 3.5% in 2022 and 4% in 2023.
- An increase in overall US recession risk from 30 to 50% in 2023. The confluence of uncertainties around the outlook implies that a wider range of potential outcomes is now possible.
- European outlook is weaker with near term recession risk rising due to greater direct exposure to the Ukrainian crisis.
As a result of the new forecast, Galvin said that Rochdale advisors are focused on higher quality US companies with durable franchises, strong management teams and reasonable valuations.
“We're taking a defensive position to lower volatility in portfolios to weather the increased risks that lie ahead," said Galvin.
IS A RECESSION APPROACHING?
City National Rochdale CEO Garrett D'Alessandro said that the unprecedented number of factors with uncertain outcomes raises the risk of a “negative feedback loop" and the possibility of a mild recession. According to Rochdale, the probability of a mild recession in 2023 with 0% to -1% growth is 40%, while the probability of a period of slow growth of 1% to 1.5% is 30%. The likelihood of normal growth of 2% to 2.5% is 20% and a normal recession of -1% to -4% growth is 10%.
D'Alessandro pointed out that unlike during the great financial crisis, the U.S. banking system is safe, the housing market is strong, wages are growing, and consumers and businesses are strong.
"We're more likely to be in a normal cyclical experience," D'Alessandro said. “The only thing that we don't know is whether there will be other consequences of the Russian invasion of Ukraine and, possibly, the Fed making a policy mistake. All other signs indicate to us that we might have slow growth, no recession or a short or mild recession."
Changes in the outlook since the beginning of 2022 show a continued expectation of an economic slowdown over the next two quarters, said D'Alessandro, but the 2023 outlook is more uncertain than normal.
However, US fundamentals are broadly strong with, many measures of the economy at record levels. That should help mitigate the headwinds and can act as a bulwark against the dangers of a mild recession, D'Alessandro commented.
NORMAL SHORT-TERM VOLATILITY
The stock market's increased volatility stems in part from the Fed's aggressive actions to slow inflation.
“Sometimes when you slam on the brakes you get unintended consequences," D'Alessandro noted.
Equities have declined 30% to 35% on average during cyclical recessions. So far in this cycle, equities are down 20% to 30%, according to D'Alessandro.
“We've experienced a lot of the average decline already, and that's not good, but the good part of that is that we feel we're two-thirds or three fourths of the way through a potential full equity decline if we end up in a mild recession," said D'Alessandro. “If we have additional shocks and they're much worse than we anticipate, we could have a more normal recession."
This year’s correction has removed a significant amount of excess that had been built up in the market, and equities are approaching more fairly priced levels, according to Rochdale. However, higher inflation presents additional downside risks for equity valuations. Once equities do hit bottom, markets have historically shown strong 12-month returns on average.
Fed policies to bring down inflation have already slowed demand for homes because the housing market is the most interest-rate sensitive sector of the economy, said Rochdale Managing Director, Senior Economist and Senior Portfolio Manager Paul Single. As the housing market slows, other types of consumer spending are anticipated to slow as well.
The pandemic created a rapid increase in consumer spending on goods and a shift from spending on services. Recent data show that pattern is now reversing.
“Consumption is going to be more in line with what income is going to be, adjusted for inflation," said Single
ADJUSTING INVESTMENT STRATEGIES BASED ON ECONOMIC OUTLOOKS
Short-term volatility in the bond market reached unprecedented levels in 2022 due to the surprisingly quick reaction to Fed tightening policies, said Rochdale Co-Director of Fixed Income Charles Luke. However, there is a potential that bonds could become more attractive in 2023.
The 10-year Treasury yield will remain under pressure, Luke said.
According to Rochdale's research, a “flattening curve," which shrinks the difference between short-term and long-term interest rates, will limit the increase in yields in 2023 to 4%.
Allocation recommendations from Rochdale managers focus on long-term yield opportunities, which will vary depending on whether the U.S. enters a period of slow growth or a mild recession.
“Our main focus is yield for our investors," said Luke. “If you're a high net-worth investor looking for the best tax shelter, you should consider high yield municipal bonds."
Since the beginning of 2022, Rochdale has repositioned its investments to lower its risk profile, said Galvin. In addition to emphasizing U.S. companies, Rochdale remains unallocated to European equities given greater near-term headwinds and continuing longer-term structural challenges, and has also sold exposure to Emerging Markets Asia equities with the outlook for the region deteriorating amid higher policy and financial risks.
Overall, Rochdale managers have been reducing exposure to cyclical equities and increasing their investments in high-quality U.S. companies and income equities selling at reasonable valuations.
Rochdale is particularly focused on blue-chip stocks, which should perform well as the economy continues grows but also have defensive characteristics including consistent earnings growth and well-established market positions that can help weather a recession should one occur.
“We advise investors to avoid highly speculative tech stocks, and anything associated with cryptocurrency," said Galvin.
REVIEW YOUR PORTFOLIO WITH YOUR WEALTH PLANNERS TODAY
City National encourages you to review your investment portfolio with your advisor. Contact our financial professionals today for help with your wealth planning needs.
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 on the date of this document and are subject to change. Alternative investments are speculative, may entail substantial risks, offer limited or no liquidity and may not be suitable for all investors.
Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.
As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.
Diversification may not protect against market loss or risk.
All investing is subject to risk, including the possible loss of the money you invest.
This information is provided pursuant to a specific request and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of City National Rochdale. Analytical results have many inherent limitations and no representation is made that any investor will or is likely to achieve results similar to those shown. Changes in the assumptions used may have a material impact on the derived performance presented. The views expressed are also subject to change based on market and other conditions.
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations.
City National Rochdale Proprietary Quality Ranking is the weighted average sum of securities held in the strategy versus the S&P 500 at the sector level using the below footnoted formula.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet). *Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of June, 2022.
The information presented is for illustrative purposes only based on various assumptions. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used have been stated or fully considered. There are no representation made that any investor will or is likely to profit similar to those shown. This information is not intended to be used or construed as tax advice, and cannot be used by the recipient for the purpose of avoiding penalties and/or any tax liabilities that may be imposed under local tax codes in the applicable jurisdictions.
The material contains forward or backward -looking statement regarding intent, beliefs regarding current or past expectations. 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 subject to change based on market and other conditions. There can be no assurance that an investor will achieve profits or avoid incurring losses.
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.
Alternative investments are speculative, may entail substantial risks, offer limited or no liquidity and may not be suitable for all investors.
Private investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information.
As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification may not protect against market loss or risk.
All investing is subject to risk, including the possible loss of the money you invest.
Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses. Past performance is no guarantee of future performance.
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.
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.
Muni Bond: A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools. These bonds can be thought of as loans that investors make to local governments.
Bloomberg Barclays U.S. Corporate High Yield Bond Index: measures the USD denominated, high-yield, fixed-rate corporate bond market.
Dow Jones Select Dividend Index: The Dow Jones U.S. Select Dividend Index looks to target 100 dividend-paying stocks screened for factors that include the dividend growth rate, the dividend payout ratio and the trading volume. The components are then weighted by the dividend yield.
The Intercontinental Exchange (ICE): The Intercontinental Exchange (ICE) is an American company that owns and operates financial and commodity marketplaces and exchanges.
The Bloomberg Aggregate Bond Index: "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange- traded funds (ETFs) as a benchmark to measure their relative performance.
U.S. Treasury Yield Curve: refers to a line chart that depicts the yields of short-term Treasury bills compared to the yields of long-term Treasury notes and bonds.
Consumer Price Index (CPI): is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
Bloomberg Barclays US Aggregate Bond Index: The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.
MSCI Emerging Asia PE: The MSCI Emerging Markets Index is a selection of stocks that is designed to track the financial performance of key companies in fast- growing nations. It is one of a number of indexes created by MSCI Inc., formerly Morgan Stanley Capital International.
Global Equity Markets: a global market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets.
The Commodity Research Bureau (CRB) Index acts as a representative indicator of today's global commodity markets. It measures the aggregated price direction of various commodity sectors. This commodity index comprises a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. The CRB is designed to isolate and reveal the directional movement of prices in overall commodity trades.
An investment grade is a rating that signifies that a municipal or corporate bond presents a relatively low risk of default.
The Bloomberg Barclays Municipal High Yield (HY) Index is a flagship measure of US municipal tax -exempt high yield bond market.
Michigan Consumer Confidence Index: The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy.
Conference Board Measure: The Consumer Confidence Survey® reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates. Data are available by age, income, 9 regions, and top 8 states.
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 expected returns shown do not include fees for trading costs (e.g., commissions) or any fees charged by your financial advisor. Please speak to your financial advisor for a complete understanding of all fees.
City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor. Content from the June 30, 2022 presentation, "Outlook Update: Higher for Longer" 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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