Quarterly Update

Tom Galvin, Chief Investment Officer | Jan. 2021

Pivoting to a Post-pandemic Expansion

Post-pandemic economic expansion expected to last several years

Improved clarity provides increased confidence in economic outlook

Correction in risk assets overdue; believe it would be a buying opportunity

It is hard to recall another year in recent times that would even approach the incredible events of 2020. What started off as a novel virus, found in a far-off land, triggered unimaginable developments in every corner of the world, and did so in the blink of an eye.

Uncertainty surrounding the first global pandemic in 100 years and historical evidence that most vaccine development efforts fail or take years, combined with the unprecedented shutting down of national economies on a global scale, made the risk of severe and prolonged capital destruction very high. During these periods of high risk of capital destruction, City National Rochdale believes it is prudent to adopt a capital preservation strategy, which we did.

As the calendar turns to 2021, we know a lot more than we did in those frantic days when the financial markets seemed to be collapsing on themselves. We now know that policymakers will quickly step in to keep the nation’s economic heart beating until this crisis passes, and on a scale never seen before. We know that safe and highly effective vaccines are on their way, with the promise of a return to more normal life as soon as this summer. And we know that in the meantime, American businesses will find innovative ways to adapt and weather the downturn.

With improved clarity has come improved confidence in the outlook, and our client portfolios are now positioned for a post-pandemic expansion we suspect will last for several years. Although the hardships brought about by the COVID-19 outbreak are very real and ongoing, it is encouraging so far 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.

The great success story of this crisis has been the actions of government officials in backstopping markets and providing a fiscal lifeline to business and households with direct payments but also with loan forbearance and noneviction policies. Massive stimulus has not only helped avert the cascade of business failures that would normally accompany such a severe economic downturn but 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, all this should help propel future spending, investment and earnings growth once the economy begins to reopen.

Investors certainly seem to be in tune with this view. Stock indices have, not unreasonably, continued to build on optimism of a vaccine-driven return to normalcy, with expectations for greater fiscal stimulus under a new, Democrat-controlled government. However, it is important to remember that we are not out of the woods just yet and that the next few months are likely to be challenging. The winter resurgence of the virus is still upon us, weighing down economic growth, and while the U.S. appears to now be moving past the peak post-holiday surge, if highly contagious variants of the virus begin hitting our shores, there is a chance things could take a turn for the worse before vaccine distribution becomes more widespread.

Of course, this doesn’t mean stock gains have been exhausted. Indeed, an entrenched expansion should set the stage for an extended bull market, with the same forces that drove the post-Great Financial Crisis decade-long rally — positive growth, low inflation, negative real interest rates and supportive monetary policy — continuing to put upward pressure on equity prices in general.

We would view such a correction as a buying opportunity given our increased confidence in the post-pandemic expansion. Finally, we are confident our pivot to the post-pandemic expansion, rebounds in our high dividend and opportunistic income strategies, differentiated asset allocation approach and regional equity allocation will add value to client returns in 2021 and beyond.

Key Points

Post-pandemic economic expansion expected to last several years

Improved clarity provides increased confidence in economic outlook

Correction in risk assets overdue; believe it would be a buying opportunity

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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

Bloomberg Barclays Municipal Bond Index is a market-value-weighted index for the long-term tax-exempt bond market. To be included in the index, bonds must have a minimum credit rating of Baa. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least 1 year from their maturity date.

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

Indices are unmanaged and one cannot invest directly in an index.

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