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CNR Speedometers®

Forward-Looking Six to Nine Months


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Global Economic Outlook

Against a backdrop of higher inflation, aggressive policy tightening and elevated geopolitical risk, the global economy appears heading toward a recession. Recent developments have made a bad situation worse for central banks and what was already a challenging global environment has become even more challenging. Not only is inflation proving more persistent than policymakers had hoped, but several have had to contend with currency weakness and fiscal policy complications at the same time. However, the impact of these forces is being felt unevenly across economies. Europe remains most vulnerable to the fallout from the War in Ukraine given its reliance on Russian energy imports and is likely already in recession. China’s economy is slowing more than expected and will likely continue to struggle with fading export demand, only limited policy support and intermittent lockdowns. Meanwhile, risks of a financial shock have grown in Asia and Europe, as currency and fixed income markets experience high levels of volatility. The US economy continues to remain best positioned against these growing headwinds, given the health of its labor market and private sector balance sheets. However, higher inflation and rising borrowing costs have already taken a significant bite out of economic activity. With the Fed remaining committed to reining in inflation, it is unlikely that weaker economic data will be enough to deter officials from hiking aggressively this year. As a result, we now believe the risk of recession in the US over the next 12 months has risen to 60%. Although the strength of US fundamentals should lessen the impact of interest rate increases, with economic momentum slowing, the expansion is likely to become increasingly vulnerable to a potential misstep by policymakers or an additional exogenous shock from abroad.

Fixed Income Outlook

Higher-than-expected inflation readings continue, and we now project the Fed will raise the Federal Fund rate to between 4.50%-5.00% this cycle. Measures of global supply chain stress have improved modestly, easing the immediate pressure on commodity and food prices, but risks remain that could push them higher. Combined with the Fed’s intervention on rates, financial conditions are tightening from the demand side. Long-term interest rates are facing significant levels of volatility and the removal of liquidity from a reduction in the Fed balance sheet, higher short-term interest rates and the higher cost of debt are forcing yields higher. This pressure is likely to persist through the rest of this year and into 2023 with the potential to reach well above 4.0% on the US 10-Year Treasury. With higher rates and credit concerns stemming from a slowdown in growth, certain areas of the market are starting to look fairly valued. We believe the below-investment grade market is stable, although we remain cautious at this stage in the economic cycle. We also believe that investment grade taxable and municipal bonds offer the most value relative to opportunistic income in 15 years. Further, for investors looking to shield income from taxes, we believe municipal bonds offer value beyond maturities of 5 years compared to high-grade taxable bonds. We are more comfortable adding interest rate exposure, after the spike in long-term yields, but the competing influences of inflation and growth will continue to keep volatility high in the bond market. So we continue to recommend the short-term market, and also a reduction in opportunistic income allocations in favor of investment grade over the next 12 months.

Equity Outlook

The most aggressive monetary tightening cycle in decades has shaken global markets this year with concerns that central bank efforts to rein in inflation will end in recession. Investors have cause to worry, historical evidence shows how tightening cycles have often ended in economic downturns when inflation needs squeezing out of the system. Given the strong relative advantages the US economy enjoys over other regions of the world, we continue to favor US equities. Today’s environment of heightened uncertainty favors companies with records of large-cap secular growth, stability and defensiveness. These characteristics define a much higher proportion of the US market relative to the rest of the world. Still, the rising risk to the outlook indicates near-term caution remains warranted and we have lowered our overall equity exposure to a modest underweight. Despite the recent rally in equity markets, we continue to see additional downside potential for stock prices in the coming months. Rallies are a common feature of bear markets. Although valuations have adjusted, the earnings adjustment process has a way to go and CNR thinks that consensus expectations remain too optimistic given elevated uncertainty around the outlook and rising recession risk. We think investors will need better clarity on the path of inflation and Fed tightening, as well as the outlook for economic and earnings growth before a sustainable rally takes hold. In the meantime, we remain focused on holding high-quality, reasonably valued US companies with durable franchises and strong management teams to help weather a recession should one occur.

Our Proprietary Global Economic & Market Summary Indicators

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  • Monetary Policy

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    Monetary Policy

    What we see

    Monetary policy is one of two ways the government can influence the economy and financial markets. By manipulating interest rates, the Federal Reserve can raise or lower the cost of money to stabilize or stimulate the economy. For example, if the cost of credit is reduced, more people and firms will borrow money and the economy will grow. Higher interest rates will increase the cost of its debt, reducing borrowing and company profits, and may slow economic growth.
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  • US Economic Outlook

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    US Economic Outlook

    What we see

    City National Rochdale's investment and portfolio strategy is driven by our macroeconomic analysis. Timely economic forecasting is very difficult to do but extremely important, especially as the significance of economic information to financial markets continues to rise. To form a reliable outlook for the economy, City National Rochdale utilizes a comprehensive internal research effort that is complemented by an extensive set of external research from some of Wall Street's leading strategists. This approach allows us to develop a complete and dependable forecast of economic conditions. Our economic outlook indicator provides our forecasted expectation for how well the U.S. economy will perform over the next 3-6 months.
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  • Yield Curve

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    Yield Curve

    What we see

    The shape of the yield curve gives an idea of future interest rate changes and economic activity. There are three common yield curve shapes: normal, inverted, and flat. A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds, due to the risks associated with time, and can signal improving economic growth. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. In a flat or humped yield curve, the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition.
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  • Consumer Sentiment

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    Consumer Sentiment

    What we see

    How consumers feel about their overall financial health as well as that of the economy on the short and long term. This is an important indicator, as the consumer is the largest driver of the U.S. economy.
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  • Disposable Personal Income

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    Disposable Personal Income

    What we see

    The amount of money households have available for spending and saving after income taxes. A change in a household's real income is by far the most important factor in determining how much that household will spend. Other factors, such as home values or financial savings, matter as well but to a significantly lesser extent.
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  • Labor Market

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    Labor Market

    What we see

    Research has shown that employment and income expectations, along with credit availability, are the most important determinants of consumer spending. Personal consumption amounts to roughly 70% of GDP, making a strong labor market essential to a healthy economy.
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  • Housing / Mortgages

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    Housing / Mortgages

    What we see

    Housing is an important indicator of the overall economy and a key driver of investment and job growth. We look at such things as starts, permits, foreclosures, delinquencies, and bank lending to assess the sector's health.
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  • Consumer Spending

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    Consumer Spending

    What we see

    Aggregate level of consumer spending. Since consumers are the largest driver of the U.S. economy, their spending patterns have a large impact on overall economic activity.
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  • Interest Rates

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    Interest Rates

    What we see

    Interest rates control the flow of money in the economy. High interest rates curb inflation, but also slow down the economy. Low interest rates stimulate the economy, but could lead to inflation. Interest rates affect the economy slowly. When the Federal Reserve changes the Fed Funds rate, it can take 12-18 months for the effect of the change to percolate throughout the entire economy.
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  • Fiscal Policy

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    Fiscal Policy

    What we see

    Changes in tax rates, regulation, and government spending affect the decision-making process of consumers and businesses. By changing tax laws, the government can effectively modify the amount of disposable income available to taxpayers or raise the costs for businesses. However, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.
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  • Business Outlook Spending/Surveys

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    Business Outlook Spending/Surveys

    What we see

    Surveys of the business community on current and expected trends. This is a gauge on businesses' spending plans that provides an insight into wages, inflation, and capital equipment spending.
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  • Leading Indexes

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    Leading Indexes

    What we see

    We look at a number of indices that have a strong track record in anticipating turns in business cycles. These include measures of production, employment, income, and sales, which have a strong correlation to subsequent economic activity. These indices provide a comprehensive summary gauge of future U.S. economic conditions, with an average lead of 12 months at business cycle peaks and 6 months at business cycle troughs.
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  • Corporate Profit Growth

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    Corporate Profit Growth

    What we see

    Corporate earnings have a significant influence on the stock market as they ultimately drive stock prices. The value of securities is the present value of all future cash flows. Companies either reinvest earnings or pay them out to shareholders as dividends, which directly impact the stock price. As future expectations increase, future projections of company earnings will also increase.
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  • International Economic Outlook

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    International Economic Outlook

    What we see

    The world has become increasingly interconnected through trade and the flow of capital, and emerging markets in particular have risen in importance as drivers of global growth. Moreover, we believe a global perspective is integral to any investment strategy.
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  • Political Environment

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    Political Environment

    What we see

    The overall political climate in the U.S. with a focus on whether it will be supportive or restrictive to economic growth. For instance, while the state of discourse in politics can be tense and deadlocked, it may not be restrictive to growth. Conversely, there could be bipartisan action that is restrictive to growth. It is important to note that this category refers not to the state of discourse, but to the market impact.
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  • Inflation

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    Inflation

    What we see

    While a slow, persistent rise in prices is consistent with a healthy, growing economy, a rapid increase in inflation, especially if unanticipated, can be harmful. Inflation means higher consumer prices, which often slows sales and reduces profits. Higher prices often lead to higher interest rates. Over time, inflation can also wear away at the value of stocks, which is why it is crucial to monitor.
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  • Credit Demand / Availability

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    Credit Demand / Availability

    What we see

    Availability of credit from banks and the overall financial sector to provide capital to the economy. Restrictive credit conditions are a headwind to economic activity, while accommodating conditions may boost it.
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  • Energy Costs

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    Energy Costs

    What we see

    Significant changes in energy/oil prices can have important but differing impacts on the overall economy. Higher energy prices act as a tax on consumers and businesses, absorbing money that would normally be used to buy other goods. However, they can also boost production and investment in the mining and energy sectors of the economy. Lower energy prices can increase consumer spending and lower manufacturing costs.
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  • Equity Market Valuation

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    Equity Market Valuation

    What we see

    Questions of value are always subjective and relative. We believe that equity market valuation should be measured against both the value of stocks at their historical levels and the other investment options available. A stock is worth its future earnings, but that involves a degree of uncertainty, which affects its price depending on the degree. In addition, investors have many other asset classes to choose from, including corporate bonds, Treasury bonds, alternative investments, and the like. We look at all of these factors before we determine what we believe to be a fair equity market valuation.
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  • Geopolitical Risk

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    Geopolitical Risk

    What we see

    Geopolitical risk examines how geography and economics influence politics and international relations. Geopolitical risk includes the risk associated with international policy, trade, and global financial market stability, as well as wars, terrorist acts, tensions between states, and other events that can impact the normal and peaceful course of international relations.
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