Quarterly Update

Tom Galvin, Chief Investment Officer | Apr. 2021

Economy Poised for Strongest Growth in Nearly 40 Years

Households in better financial shape than before pandemic

Additional fiscal support is on the way

Further stock gains likely to be gradual

This past March marked the one-year anniversary of the moment when a novel, little-understood virus brought daily life to a standstill and triggered the deepest economic contraction since the Second World War. Yet, barely 12 months later, the U.S. economy is poised to record its strongest period of growth in nearly four decades. It may be too early to declare victory against COVID-19, but significant progress in that battle has been made and for the first time in a long time a return to more normal life doesn’t look too far off.

The biggest development over the past three months has come on the vaccine front, where efforts have exceeded all expectations and the U.S. continues to outpace the world. At a current pace of close to 3 million shots a day, herd immunity is potentially within reach by early summer. Already, 42% of the adult population in the U.S. has received at least one vaccine dose, allowing an increasing number of states to lift almost all restrictions on activity and mobility trends to recover to early-pandemic levels.

The other great success story of this crisis has been the actions of government officials in backstopping markets and providing a fiscal lifeline to businesses and households through direct payments, forgivable loans and many other measures. Although the hardships brought about by the pandemic are still very real and ongoing, it is encouraging to see how limited the signs of long-term economic damage have been, and we expect that this recovery will be faster and more durable as a result.

So far, Washington has passed $5 trillion in fiscal stimulus packages to fight the pandemic and mitigate its economic impact, including last month’s $1.9 trillion American Rescue Plan. Massive stimulus has not only helped avert the cascade of business failures that would normally accompany such a severe economic downturn but has also allowed consumers to accumulate plenty of savings, leaving aggregate household balance sheets, believe it or not, in a stronger position than they were pre-pandemic.

Together, this should help propel future spending, investment and earnings growth as the economy continues to reopen. And more fiscal support is on the way, with two big spending bills likely to be passed later this year. If well executed, the Biden administration's American Jobs and Families Plans have the potential to modestly boost long-term economic output. Higher taxes to pay for these programs are likely, a modest negative for the economy and corporate profits in the near term as their impact will be felt more immediately and quickly priced in by the market, but the stimulus spending will be spread out over a decade, providing a persistent tailwind to growth and earnings.

With greater confidence in the outlook, our client portfolios are now positioned for a post-pandemic expansion we suspect will last for several years. A successful vaccination rollout, faster reopening schedule, and larger-than-expected stimulus all point to strengthening growth prospects for the U.S. economy relative to where things stood just three months ago. However, markets have gone through an unusually swift recovery over the past year, and we believe investors have incorporated most of the coming economic acceleration into current prices.

This means gains from here are likely to be more gradual and that the stock market could face near-term headwinds caused by the economy’s better-than-expected recovery, including higher interest rates that will weigh on valuations, concerns that the Fed may tighten earlier than expected, and the potential for higher taxes. There are also some signs of froth in segments of the market as stock prices have essentially moved in a straight line higher since last February’s lows. While we don’t think any of these concerns will undermine long-run prospects for this still young bull market, we also know that stocks do not move up in a straight line forever and that volatility is inevitable.

Key Points

Households in better financial shape than before pandemic

Additional fiscal support is on the way

Further stock gains likely to be gradual

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Important Disclosures

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

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.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation. 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.

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. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and 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.

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. 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.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

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

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.

CNR is free from any political affiliation and does not support any political party or group over another.

Index Definitions

The Treasury index is an index based on recent auctions of U.S. Treasury bills and is commonly used as a benchmark when determining interest rates, such as mortgage rates.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Palmer Square CLO Debt Index (“CLO Debt Index”) is a rules-based observable pricing and total return index for collateralized loan obligation (“CLO”) debt for sale in the United States, original rated A, BBB, or BB or equivalent.

The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

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

The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market.

Bloomberg Barclays 1-3 Year Government/Credit Index (LGC3truu) is an unmanaged index considered representative of short-term U.S. corporate and government bonds with maturities of 1-3 years.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

Bloomberg Barclays U.S. Corporate High Yield Index (barhiyd) is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues), and at least 1 year to maturity.

Bloomberg Barclays High Yield Municipal Bond Index (barhiym) is an unmanaged index considered representative of non-investment-grade bonds.

Vanguard Consumer Staples ETF seeks to track the performance of a benchmark index that measures the investment return of consumer staples stocks.

The iShares U.S. Utilities ETF seeks to track the investment results of an index composed of U.S. equities in the utilities sector.

Vanguard Real Estate ETF seeks to track the investment performance of the MSCI US Investable Market Real Estate 25/50 Index.

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