Quarterly Update

Q3 2022

Paul Single, Managing Director, Senior Economist, Senior Portfolio Manager | October 2022

The Fed’s New Motto Seems to Be: Supersize It!

The Fed has moved to a very hawkish stance against inflation

The Fed is willing to allow weaker economic growth in order to reduce inflationary pressures

The Fed is committed to returning inflation to the target rate of 2.0%

Since the end of last year, the Fed’s view on the economy has evolved. Despite the significant slowing in the pace of economic growth, there has not been much of a change in the unemployment rate.

And despite the central bank raising the overnight Fed Funds rate from the near-zero level back in March to today’s 3.875% (with plans to raise it further), inflationary pressures have continued to increase (see chart 1).

At its recent meeting in early-November, the Fed made a very hawkish move. It barreled ahead with a fourth rate hike of 75 bps. Its plan in the future appears to slow the size of future hikes, but the Fed is hinting that it may end up with a higher terminal rate than previously thought, which was 4.6%. The reason for the slowing pace of future hikes is to buy time to see what economic impact the hike has on the economy, and the economic impact tends to be delayed.

The Fed continues to believe it will be able to arrange a soft landing for the economy. But it will be a bumpier ride than previously thought. The economy’s growth rate should crater this year at 0.2%. However, the Fed expects the pace next year to rise to 1.2%, this despite the significant jump in financing costs for households and businesses and a higher unemployment rate.

The expected rate increases reflect the Fed’s determination to quell the highest bout of inflation since the early 1980s. This pace of interest rate increases is the fastest since 1980 (see chart 2). The Fed made it clear: “The committee [FOMC] is strongly committed to returning inflation to its 2% objective.” That is consistent with their previous messages that inflation is public enemy number one.

Fed Chair Jerome Powell had previously asserted that the Fed could raise interest rates enough to tame inflation without causing a recession (the so-called “soft landing”). But recently he altered that message a bit, acknowledging that higher interest rates and a slower pace of economic growth “will bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”

Key Points

The Fed has moved to a very hawkish stance against inflation

The Fed is willing to allow weaker economic growth in order to reduce inflationary pressures

The Fed is committed to returning inflation to the target rate of 2.0%

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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.

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Index Defintions

S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes.

Bloomberg Barclays US Aggregate Bond Index (LBUSTRUU): The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

GT2 Govt, GT3 Govt, GT5 Govt, GT10 Govt, GT30 Govt: US Government Treasury Yields

DXY Index: The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of curren-cies of the majority of the U.S.’s most significant trading partners.

Dow Jones U.S. Select Dividend Index (DJDVP): The Dow Jones U.S. Select Dividend Index looks to target 100 dividend-paying stocks screened for factors that include the dividend growth rate, the dividend payout ratio and the trading volume. The components are then weighted by the dividend yield.

P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).

The Commodity Research Bureau (CRB) Index acts as a representative indicator of today’s global commodity markets. It measures the aggregated price direction of various commodity sectors.

The MSCI indexes are market cap-weighted indexes, which means stocks are weighted according to their market capitalization — calculated as stock price multiplied by the total number of shares outstanding.

Quality Ranking: City National Rochdale Proprietary Quality Ran king is the weighted a verage sum of securities held in

the strategy versus the S&P 500 at the sector le vel using the below formula.

City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted b y debt levels), 15% Earnings Stability (v olatility of earnings), 15% Re venue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of compan y) 15% Balance Sheet Quality (fundamental strength of balance s heet).

*Source: City National Rochdale proprietary r anking system utilizing MSCI and FactSet data. **Rank is a perc entile

ranking approach whereby 100 is the highest possible score and 1 is the lowest. The Ci ty National Rochdale Core compares the weighted average holdings of the str ategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.

Rank is a percentile ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of June 2022.

Bloomberg Barclays US Aggregate Bond Index: The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The Case-Shiller Index, formally known as the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, is an economic indicator that measures the change in value of U.S. single-family homes on a monthly basis.

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