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.