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CNR Speedometers®

Forward-Looking Six to Nine Months


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Global Economic Outlook

With recent economic data proving surprisingly resilient, and China’s reopening going better than expected, the global outlook has improved marginally. Nevertheless, growth prospects remain subdued across economies by historical standards and risks continue to be skewed to the downside as the full force of global monetary tightening has yet to be felt. Europe remains most vulnerable to the fallout from the ongoing War in Ukraine, and with its economy still facing strong headwinds from high inflation, the drag from high interest rates looks set to intensify. Meanwhile, though the near term outlook for China has brightened with the government’s lifting of its zero-COVID policy, we think reopening will likely prove more difficult than many assume and the attendant rebound in consumer spending is expected to be offset somewhat by weaker global demand for Chinese exports. In the US, recent resilience in economic activity has led us to modestly lower our overall recession risk from 75% to 70%, and modestly raise growth expectations for 2023. However, recognizing the lagged effects of policy tightening and the Fed’s continued resolve to rein in inflation, we believe a mild recession is still the most likely economic outcome sometime over the next couple of quarters. Despite this, the economy’s underlying fundamentals continue to be in much better shape relative to the eve of prior recessions and provide a strong argument against a deeper and longer lasting downturn developing. Inflation trends are now moving in a favorable albeit choppy direction, household balance sheets are generally healthy, labor demand is resilient and banks are well capitalized.

Fixed Income Outlook

Recent inflation measures have signaled easing price pressures but given the continued tightness of the labor market and steady consumer spending, we continue to project the Fed will raise the Federal Funds rate to between 5.00%-5.25%, with the risk now skewed toward an even higher target rate. 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 higher cost of debt will continue to put pressure on yields, despite the improvement in inflation readings. This pressure is likely to persist through the rest of this year, preventing longer-term yields from dropping lower. With higher rates and credit concerns stemming from a slowdown in growth, we believe that investment grade taxable and municipal bonds offer the most value in 15 years, especially investments within 3 years. Further, for investors looking to shield income from taxes and to meet future obligations, we believe municipal bonds offer value beyond maturities of 5 years. We remain cautious in adding interest rate exposure overall, especially after the spike in long-term yields and better than expected economic data, which may force the Federal Reserve into more interest rate hikes than planned. Further, the competing influences of inflation and growth will continue to keep volatility high in the bond market, so we recommend the short-term market and a reduction in opportunistic income allocations in favor of investment grade over the next 12 months.

Equity Outlook

After a very difficult year, equity markets are off to a much more positive start in 2023. However, we remain cautious for now as we suspect the many factors that have concerned investors– persistent inflation, hawkish central banks, elevated recession risk and ongoing geopolitical uncertainty – will keep markets volatile in the near term before eventually giving way to more favorable investment conditions later this year. From a regional perspective, we continue to prefer large cap and income US equities over other global markets. Today’s environment of heightened uncertainty favors companies with records of secular growth, stability and defensiveness – characteristics that define a much higher proportion of the US market relative to the rest of the world. While history suggests we are coming close to the end of the cyclical bear market, we see the potential for further declines in stock prices over the coming months, with earnings expectations the biggest source of downside risk. Though consensus estimates have come down significantly over the past several months, they remain too optimistic given higher uncertainty around the outlook and elevated recession risk. Investors will likely 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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