City National Rochdale | May 1, 2020

The Great Upheaval

Key pandemic indicators tracked by City National Rochdale - coronavirus spread and mortality, virus testing, and policy response - all have swung into positive territory for the first time since the outbreak.

Several other countries have started to reopen their economies, and various U.S. states, including California, Texas and New York, have taken steps to show they’re ready and willing to do the same.

The United States appears to have passed its peak of coronavirus hospitalizations, with a phased return to more normalcy possible starting in May.

Despite the positive signals, various forces continue to hit the economy and markets, including an extraordinary drop in oil prices sparked in part by declining demand amid the coronavirus shutdown.

The pandemic has taken a staggering toll, with more than half of U.S. small businesses currently closed and more than 25 million Americans out of work.

Several moves over the past week signal important progress toward reopening the U.S. economy, although the coronavirus pandemic and global oil price collapse continue to inflict unprecedented damage, City National Bank’s investment team told clients.

Some of the encouraging moves they discussed include:

  • Companies starting to announce reopening plans.
  • States communicating achievable criteria for restarting their economies as the framework is being put in place for the improved virus testing and tracking needed for that to happen.
  • General agreement on how frequent, widespread testing, quarantines for confirmed cases and rigorous contact tracing are key to containing the virus and resuming business.


  • “The major developments this week were actually very positive,” said Garrett D’Alessandro, CEO of City National Rochdale, the bank’s investment advisory organization, during the team’s weekly market update Monday.

    While the bank’s portfolio managers maintain a cautious stance on the financial markets, even as they step toward a gradual and steady economic recovery, they reiterated their investing philosophy.

    Capital preservation is equally as important as capital appreciation.

    OTHER SIGNS OF PROGRESS

    Key pandemic indicators tracked by City National Rochdale - coronavirus spread and mortality, virus testing, and policy response - all have swung into positive territory for the first time since the outbreak, D’Alessandro said, adding that these gauges reflect the team’s outlook for conditions a few weeks down the road.

    He expects that over the next four weeks, testing will ramp up to a point more than sufficient to get back to business.

    More signs of encouragement come from:

    • Central banks. Central banks are injecting trillions of dollars into the global economy to help mitigate the unparalleled decline in economic activity around the world, notably the business shutdowns and job losses triggered by the pandemic, D’Alessandro noted.
    • U.S. policymakers. Last week, U.S. policymakers approved another emergency relief package – $484 billion in funding for small businesses, hospitals and coronavirus testing. Note that crisis spending bills so far should support the economy through May, but further stimulus will likely be needed as businesses start to reopen, the team said, citing City National Rochdale and Bloomberg data.
    • Government programs. Roughly 14 separate U.S. Federal Reserve Bank and other government programs are now supporting the economy and laying the groundwork for recovery, said Charles Luke, who heads City National Rochdale’s taxable fixed-income team.

THE CRITICAL RELATIONSHIP OF TESTING AND REOPENING

Several other countries have started to reopen their economies, and various U.S. states, including California, Texas and New York, have taken steps to show they’re ready and willing to do the same, D’Alessandro said.

Issues that have delayed sufficient testing are gradually being solved, although significant improvement is needed, he said, adding that tests ultimately must be made widely available to consumers via major retail chains.

In addition, the United States appears to have passed its peak of coronavirus hospitalizations, with a phased return to more normalcy possible starting in May, D’Alessandro said, citing data from the COVID Tracking Project and CalMatters.

The question, D’Alessandro said, will be how willing people are to return to work or resume typical social behavior.

“Reopening doesn’t automatically mean recovery or normalization,” he said.

LEAVING LOCKDOWN: THE PSYCHOLOGICAL IMPACT OF COVID-19

Research shows that people remain nervous about the virus, with nearly half fearful that they could die if they become infected, D’Alessandro said, citing The Harris Poll COVID-19 Tracker.

A return to “normal” depends on improved public confidence – getting to the point where only 10 percent worry about dying from coronavirus – which will require effective containment and communication, he added.

D’Alessandro cited new evidence from various sources suggesting that the coronavirus mortality rate may be lower than previously thought. While the fatality rate is a relatively high 5 percent based on confirmed cases, blood antibody testing on New York residents suggests it may be lower than 1 percent, he told City National clients.

He also said research suggests that population density and proximity of individuals have a greater influence on virus spread than a broad business shutdown.

WHAT ABOUT THE MARKETS?

Despite the positive signals, various forces continue to hit the economy and markets, including an extraordinary drop in oil prices sparked in part by declining demand amid the coronavirus shutdown, the team said.

They expect oil companies to experience bankruptcies and restructuring over the next several months, with hundreds of thousands of employees potentially losing their jobs.

More broadly, the pandemic has taken a staggering toll, with more than half of U.S. small businesses currently closed and more than 25 million Americans out of work, City National Rochdale Chief Investment Officer Tom Galvin noted.

Financial support provided to business and individuals through the CARES Act, signed into law last month, could replace 100 percent of income for many displaced workers, but another fiscal stimulus package may be necessary, Galvin said.

City National Rochdale’s investment committee, working on investment strategies focused on emergence from the crisis, is monitoring economic activity and corporate updates.

Many companies now report no confidence in their own earnings guidance for the year, D’Alessandro noted.

City National Rochdale expects gross domestic product to sink by as much as 6.2 percent this year and rebound by 2.5 percent to 4.5 percent in 2021, taking about two years to recover fully.

OVERVALUED STOCKS

The team considers stocks overvalued now, given the severe hit earnings are taking this year.

Earnings could decline by an average of 27 percent this year and rebound by nearly as much in 2021, they said.

In the meantime, they expect another stock market pullback in the coming months.

The portfolio managers, who were dialing down clients’ stock exposure coming into 2020, continue to place increased emphasis on high-quality companies with clear earnings visibility, Galvin said.

The team is raising cash to act as a buffer against economic turbulence and to take advantage of potential investing opportunities.

STOCKS: FOCUSING ON HEALTHCARE AND TECH

Broadly, the organization is limiting exposure to companies most damaged in the downturn, such as hotels and travel businesses.

The organization is focusing on those likely to prosper, such as U.S. hospitals, other healthcare companies and select tech firms – especially those providing the software and infrastructure to enable online events like webinars.

The team isn’t interested in stocks in developed markets outside the United States, Galvin said, citing the government’s superior economic-policy response to coronavirus, among other factors.

CREDIT: FOCUSING ON MUNICIPAL BONDS AND HIGH-YIELD BONDS

On the credit side, City National sees several opportunities in municipal bonds, including investment-grade bonds for high-quality state governments and for cities supported by federal stimulus programs.

City National also sees opportunities in high-yield bonds for essential regional hospital systems, Luke said.

They’re steering clear of bonds for states with underfunded pensions, colleges reliant on foreign students, facilities like dorms and stadiums that rely on user fees, and certain senior living centers, among other areas.

“Looking at credit generally, we think there is a huge tailwind,” Luke said.

Key Points

Key pandemic indicators tracked by City National Rochdale - coronavirus spread and mortality, virus testing, and policy response - all have swung into positive territory for the first time since the outbreak.

Several other countries have started to reopen their economies, and various U.S. states, including California, Texas and New York, have taken steps to show they’re ready and willing to do the same.

The United States appears to have passed its peak of coronavirus hospitalizations, with a phased return to more normalcy possible starting in May.

Despite the positive signals, various forces continue to hit the economy and markets, including an extraordinary drop in oil prices sparked in part by declining demand amid the coronavirus shutdown.

The pandemic has taken a staggering toll, with more than half of U.S. small businesses currently closed and more than 25 million Americans out of work.

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.

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