City National Rochdale | Jun. 8, 2020

Picking Up the Pace

While joblessness remains close to 30 million, the levels should recede as businesses reopen and slowly start to rehire.

Consumer spending, fueled by pent-up demand, is coming back nicely as states reopen — lifting both auto and housing sales and restaurant dining.

Disease spread and hospitalizations have remained largely manageable in Europe and in those U.S. states that started reopening more than a month ago.

Most high-quality stocks are fully valued with limited near-term upside, while corporate bond yields should cover only inflation for the time being.

As states gradually emerge from the coronavirus shutdown, consumer sentiment remains fragile but shows signs of strengthening, City National Bank's investment team said during their weekly market update.

The investment leaders, noting that all 50 states have reopened for business to varying degrees, anticipate economic activity will start to rebound in the second half of this year.

In addition to the promising developments, the portfolio managers cited ongoing challenges that continue to surround the pandemic and its economic effects.

"Improvements can come in fits and starts, not only in a straight line up," said Tom Galvin, chief investment officer at City National Rochdale, the bank's investment advisory organization.

Nevertheless, progress is being made. Here are the key trends City National Rochdale cited.

MASSIVE UNEMPLOYMENT MAY BE TURNING

Unfortunately, there are millions more Americans who have lost work during the coronavirus outbreak than what the official numbers indicate, according to City National Rochdale CEO Garrett D'Alessandro.

Counting gig workers and people who've left the workforce altogether, real unemployment may have totaled 36 million during the worst of the crisis, he said, citing data from Bloomberg and the Pandemic Unemployment Assistance program.

While joblessness remains close to 30 million, the levels should recede as businesses reopen and slowly start to rehire, D'Alessandro said, pointing to Bloomberg data that show how unemployment benefit claims have declined in recent days.

As small businesses rehire workers to meet Paycheck Protection Program loan forgiveness requirements, the percentage of hourly wage employees returning to work is growing steadily, he said, citing Bloomberg and Homebase data.

"We think the worst of the job losses are behind us," he said.

CONSUMER ACTIVITY IS ENCOURAGING

Consumer sentiment, hit hard by the extraordinary unemployment resulting from the pandemic shutdown, is key to the recovery, City National's investment leaders noted.

Though sentiment dropped amid the outbreak to its lowest level in nearly a decade, it may have hit bottom, given that the University of Michigan Consumer Index was unchanged from April to May, Galvin noted.

Consumer spending, fueled by pent-up demand, is coming back nicely as states reopen — lifting both auto and housing sales and restaurant dining. Galvin cited data from Womply that shows a gradual uptick in spending at restaurants since late March, when it was down 76 percent year over year.

In addition, home purchase mortgage applications returned to pre-crisis levels in May, as nesting consumers enjoyed lower interest rates that resulted from Federal Reserve actions supporting the pandemic-stricken economy, Galvin said, citing Mortgage Bankers Association data from Bloomberg.

Americans are in better financial shape now than during the 2008 financial crisis, according to D'Alessandro, who explained that the emergency economic stimulus checks the government sent to most households have boosted savings. This positions the economy well for a gradual increase in consumption over time.

He also noted that household debt as a percentage of GDP has declined significantly since the 2008 crisis, citing Bloomberg data.

BUSINESS IS TAKING ITS TIME

Businesses, on the other hand, remain reticent.

“Businesses have really turned cautious and are staying cautious in the amount of capital expenditures that they're willing to take on," D'Alessandro said.

The team expects the Fed to continue providing economic stimulus to help consumers bridge financial hardships resulting from the pandemic.

OUTBREAK TRENDS ARE LOOKING UP

While coronavirus remains a serious and lethal threat, City National's team cited several promising metrics.

Disease spread and hospitalizations have remained largely manageable in Europe and in those U.S. states that started reopening more than a month ago, according to D'Alessandro, who nonetheless noted a few areas of concentrated outbreaks.

Infection rates are higher in all states since gradual reopenings began, but they are down significantly from the initial outbreak and generally at acceptable levels, according to Ben Goetsch, City National Rochdale senior analyst-investor solutions, who cited covid19-projections.com data.

The team believes only a few warrant close monitoring.

“So far that increase has been moderate and we don't see a huge problem at this point," Goetsch said.

HOSPITALIZATIONS ARE DECLINING, FOR THE MOST PART

Hospitalizations, a key metric that will drive policy, also show encouraging signs, Goetsch said.

Hospitalizations are declining in most states that the team is tracking. Though a few, including Arizona, have seen a recent uptick, he noted, citing May 31 data from The COVID Tracking Project.

Fatalities also are generally trending downward, although not in every state, Goetsch said, citing the same report.

As states eventually move to so-called Phase 3 openings, data indicate they'll see a nudge up in new cases or hospitalizations in one to two weeks, according to D'Alessandro.

TESTING REMAINS CRITICAL

The testing pace has stalled over the last week, which is significant given the vital role testing plays not only in reopening but also in consumer sentiment, Goetsch said, citing COVID Tracking Project data.

While the positive test rate has declined to 5 percent, which is good news, states need to step up and do more testing, he said.

A FEW OPPORTUNITIES, HERE AND THERE

These various trends support City National's continued cautious stance toward the financial markets.

Most high-quality stocks are fully valued with limited near-term upside, while corporate bond yields should cover only inflation for the time being, according to the portfolio managers, who expect another equities market pullback this year.

The team sees opportunity, however, in equities paying high dividends, in high-yield bonds and in select mid-cap stocks.

While some companies have cut dividends during the pandemic, the impact has been limited, and City National has minimized its exposure to those firms, Galvin said, citing Bloomberg data that show many high-dividend sectors missed the market's recent rally.

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.

Key Points

While joblessness remains close to 30 million, the levels should recede as businesses reopen and slowly start to rehire.

Consumer spending, fueled by pent-up demand, is coming back nicely as states reopen — lifting both auto and housing sales and restaurant dining.

Disease spread and hospitalizations have remained largely manageable in Europe and in those U.S. states that started reopening more than a month ago.

Most high-quality stocks are fully valued with limited near-term upside, while corporate bond yields should cover only inflation for the time being.

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.

The Standard and 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.

The Dow Jones US Select Dividend Index includes a selection of stocks based almost entirely on dividend yield and dividend history. Stocks are also required to have an annual average daily dollar trading volume of more than $1.5 million. These criteria help to ensure that the index represents the most widely traded of the markets highest-yielding stocks.

The Mortgage Bankers Association US Purchase Index is the MBA’s weekly measurement of nationwide home loan applications based on a sample of US mortgage activity.

The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan; it is derived from a survey of consumers.

The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

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 June 3, 2020 presentation, “Picking Up the Pace," 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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