March 2023 Market Update: A Deep Dive into CNR’s Economic and Investment Outlook

March 29 Market Update Webinar


2023-03-29_Market Update.pdf
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Evaluating Interest Rates & Banking Worries

The probability of a recession occurring in the second half of 2023 has risen from 70% to 75%, according to the March 2023 market update presented by the leadership team of City National Rochdale.

However, the most likely scenario is for a mild recession, according to Garrett D'Alessandro, City National Rochdale CEO.

Inflation is expected to moderate over the year, but it will be bumpier than anticipated earlier. Generally, equities are not particularly attractive at the moment because the market isn't discounting enough for continued inflation, higher for longer interest rates and the mild recession, D'Alessandro said.

CNR Speedometers®, which are forward-looking indicators for the next six to nine months, are all yellow or red this month.

The credit speedometer turned red this month, which is particularly notable because of America's reliance on credit. Tightening credit conditions are the biggest fallout from the recent banking industry turbulence, with further tightening anticipated.

Consumer resilience, which has remained strong so far, is likely to be tested in the months ahead by the lagging impact of higher interest rates, the weight of inflation and tighter credit.

Is the Banking Sector at Risk?

While anxiety around the banking system may persist, our view is that the industry is generally on solid footing, especially when compared to the situation during the Great Recession of 2007-2008.

In comparison to that era, capital and liquidity ratios are significantly higher today than they were. Additionally, authorities have acted very swiftly to manage the current crisis compared to what they did during the Great Recession.

“Overall and in total, banks have more than sufficient capital to meet demands or stress, but we're not saying that every single bank out of the thousands of banks that exist is perfect," D'Alessandro said. “We're saying that the system overall is not likely to see anything like what happened in 2008."

Regulations are in place to maintain the flow of credit and there are a plethora of tools available to officials to manage bank stress.

A look at credit default swaps, and measures of bondholder nervousness, indicates that the markets are not seeing significant concerns about the banking system at the moment either.

However, CNR is keenly aware that restrictive policy tends to uncover vulnerabilities lurking in the financial system and that concentrated pressures on weak links in the banking sector can spill out in unexpected ways.

What Will the Fed Do Next?

Current economic strength, including consumer spending and employment activity, along with the stickiness of underlying inflation pressures, is creating a dilemma for the Fed. The Fed needs to balance the competing goals of achieving price stability (controlling inflation) and maintaining financial stability (preserving access to credit and confidence in the financial system). For now, the Fed is prioritizing controlling inflation.

chart 1

Reactions to changes in monetary policy often have a long lag time, so the full effect of Fed tightening has yet to be felt. Further tightening after recent events will likely negatively impact economic growth.

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However, CNR continues to believe that the strength of consumer balance sheets and the job market will continue to mitigate the severity of any economic downturn.

CNR continues to review its equity and fixed-income investment strategies and is comfortable with its current exposures. Portfolios are constructed to be well diversified across sectors and industries.

Bank exposure is modest, and holdings have strong fundamentals with well-balanced sources of deposits and lending books.

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Overall, CNR's portfolios have been appropriately positioned for the elevated risk of recession. CNR is maintaining its defensive positioning with a focus on holding high quality U.S. stocks and bonds. CNR remains underweight on Europe, a position that has been validated by recent developments there.

CNR anticipates that the Fed will raise the federal funds rate once more in May by 25 basis points and then pause, keeping rates at 5% to 5.25%.

While the market expects the Fed to cut rates in the coming year, CNR disagrees and expects them to hold rates higher for longer, said Charles Luke, managing director and co-director for fixed income for City National Rochdale.

Instead of cutting rates, City National Rochdale expects the Fed to turn to the other tool at its disposal, its balance sheet. Reducing that balance sheet will lower liquidity in the economy.

City National Rochdale anticipates that as a result of Fed moves, there is a high probability that the recent rally in yields will reverse itself. However, if economic data remains strong and inflation remains high, long-term rates may rise.

How Are Interest Rates Affecting Credit?

chart 4

Higher interest rates will begin to erode credit quality, which will be more acute for private lending. City National Rochdale anticipates that defaults will rise, with leveraged loans likely to face higher defaults than corporate bonds, a reverse of the historical track record.

However, the rise in defaults will be slow since maturities are pushed out beyond 2023.

chart 5

Global merger and acquisition volume has slowed to a standstill, with no deals getting done, Luke said.

City National Rochdale believes leverage may be higher than reported when profitability adjustments are reversed.

The growth in private equity and leveraged lending has changed the composition of the sector and credit quality is weaker, especially at higher interest rates.

City National Rochdale is reviewing its exposure and is likely to make reductions going forward. Investors may want to review their positions, Luke said.

Three Important Economic Trends to Watch


chart 6

CNR is watching three important trends prior to increasing equity exposure in its portfolios. The investment team is waiting to see economic activity bottoming, a start to upward earnings revisions and a peak in high-yield spreads.

“Just one event of the three isn't enough," Luke said. “Our confidence will grow when these trends happen in tandem. We still think a defensive position is best for now."


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Given the potential cuts in earnings estimates, CNR believes that equity markets are overvalued. We remain underweight on equities and overweight on investment-grade fixed income.

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CNR stands ready to reposition asset allocations as economic conditions change. Our investment strategy is in place for several scenarios, including the likelihood of a mild recession in the second half of 2023.

Important Information

This article is for general information and education only. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader's specific investment objectives. Any financial instrument discussed in this article may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment.

City National Bank provides investment management services through its wholly-owned subsidiary City National Rochdale, LLC, an SEC-registered investment advisor. Content from the March 29, 2023 presentation, "Market Update" is reprinted by permission from City National Rochdale.

City National (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this article and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, legal or regulatory advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.

Figures shown are past results and are not necessarily an indication of future results.

Equity investing strategies & products. 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.

Fixed Income investing strategies & products. There are inherent risks with fixed income investing. These risks include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity or junk bond risks. 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.

Investing in international markets. There are inherent risks with international investing. These risks include, but are not limited to, 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. In addition, emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets. Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.

High yield securities. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health. 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.

Real estate sector or REITs. Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Municipal securities. 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 the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases and changes in the credit ratings.

Alternative investments. 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.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio.

Returns include the reinvestment of interest and dividends.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Commodities. Investments in commodities can be very volatile, and direct investment in these markets can be very risky, especially for inexperienced investors.

4P framework. No representation is being made that employing the 4P framework will or is likely to achieve portfolio performance similar to that shown.

The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations.

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.

This document may contain forward-looking statements relating to the objectives, opportunities and future performance of the US and global markets generally. Forward-looking statements may be identified by the use of such words as: “expect,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. In addition, certain information upon which assumptions have been made has been provided by third-party sources and, although believed to be reliable, the information has not been independently verified and its accuracy or completeness cannot be guaranteed. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of City National Rochdale nor any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

This information is not intended as a recommendation to invest in a particular asset class, strategy or product.

The information presented is for illustrative purposes only and based on various assumptions which may not be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used have been stated or fully considered.

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 may not protect against market risk or loss. Past performance is no guarantee of future performance.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio.

Returns include the reinvestment of interest and dividends.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

The Consumer Price Index (CPI) measures the monthly change in prices paid by US consumers.

Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.

CNR is free from any political affiliation and does not support any political party or group over another.

Non-Deposit Investment Products: • Are Not FDIC Insured • Are Not Bank Guaranteed • May Lose Value

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