Boutique Investment Management Services - May 2020 Economic … · 2020-05-20 · Economic Outlook...
Transcript of Boutique Investment Management Services - May 2020 Economic … · 2020-05-20 · Economic Outlook...
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Investment management services provided by City National Bank through its wholly-owned subsidiary City National Rochdale, LLC, a registered investment advisor.
Economic Outlook and Investment Strategy
Special Coronavirus Crisis Edition
May 2020
2
Economic and Financial Indicators
City National Rochdale
indicators are signaling
short but significant
recession followed by
slow recovery starting
in Q3.
ECONOMIC & MARKET OUTLOOK
Indicators Are Forward-Looking Three to Six Months
Source: City National Rochdale. As of May 2020.
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Short, Severe Recession, Followed by Slow Recovery
City National Rochdale Forecasts 2018 2019 2020e 2021e
GDP Growth 2.9% 2.3% (-3.9%) - (-6.2%) 2.5%-4.5%
Corporate Profit Growth 22% 1% (-20%) - (-40%) 20%-40%
Interest RatesFed Funds Rate 2.375% 1.625% 0% 0%
Treasury Note, 10-Yr. 2.69% 1.50%-2.00% 0.70%-1.20% 0.80%-1.30%
ECONOMIC & MARKET OUTLOOK
GDP Q2 GDP Q3 GDP Q42020
Full Year
2021
Full Year
Potential Range of GDP
Growth
-27% +13% +10% -3.9% 2.5%
-43% +31% +17% -6.2% 4.5%
Percent Change From Preceding Period, Seasonally adjusted at annual rates
Expecting a slow, and potentially bumpy, economic recovery in the second half of 2020.
An incremental, phased reopening of the economy underway driven by states. Testing will be key.
A second wave of infections is not our base case, but is the leading downside risk.
Gradual recovery in demand expected until virus fears fade and social distancing rules are reduced.
Full normalcy not until 2021. Better therapeutic treatments and/or vaccine creation will be essential.
Policy responses from Washington/Fed have been massive and well-targeted, but more needed.
Sources: Bureau of Economic Analysis, Standard & Poor’s, Bloomberg. As of May 2020.
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Raise Cash to Manage and Mitigate Risk
ECONOMIC & MARKET OUTLOOK
Targeted Portfolio Cash Levels
(Balanced Portfolio2)
0%
20%
40%
60%
80%
100%
Late Cycle MildRecession
AverageRecession
SevereRecession…
Risk Level
0%-10%
20%-30%
10%-20%
≥30%
Source: City National Rochdale, LLC. Targeted portfolio cash levels are derived from the outcomes of City National Rochdale’s proprietary economic forecasts
and monitors. 2A City National Rochdale Balanced portfolio assumes a 60/40 split between Equities and Fixed Income asset classes. Actual client portfolio
target cash allocations will vary. As of May 2020.
50% or more
30% or less
30% to 50%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Probability of Recession in the Next 12 Months
Short Long
5
Unprecedented Size & Speed of Job Losses
As the economy re-opens, we expect the unemployment rate to drop back faster than it would in a
normal recovery.
A full recovery of job losses may take several years.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg.
2
4
6
8
10
12
14
16
1948 1957 1966 1975 1984 1993 2002 2011 2020
Unemployment Rate (%)
20000
40000
60000
80000
100000
120000
140000
160000
1948 1956 1964 1972 1980 1988 1996 2004 2012 2020
Total Nonfarm Payrolls(thousands)
Nearly a Decade’s
Worth of Job Gains
Lost in 2 Months
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Consumer Sentiment Posts Record Decline
Full restoration of confidence will be more difficult and likely only once consumers become
convinced COVID-19 has been effectively contained.
ECONOMIC & MARKET OUTLOOK
50
60
70
80
90
100
110
120
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
University of Michigan: ConsumerSentiment Index
Source: Factset.
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Reopening: So Far, So Good
No evidence of surges in states that have started gradually reopening nearly a month ago.
Each of these states is under the 10% target for positive results as a percent of total tests.
ECONOMIC & MARKET OUTLOOK
Source: The COVID Tracking Project.
0%
10%
20%
30%
40%
50%
60%
Weekly Positive Test Rate
New York Georgia Colorado Texas Tennessee Florida Target
Georgia,
Colorado,
Tennessee reopen
Texas reopens
Florida reopens New York reopens
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Reopening States Help Livelihoods of Thousands of
Workers Reopened states have seen workers returning gradually.
New York has been recovering more slowly (began reopening May 15).
ECONOMIC & MARKET OUTLOOK
Source: Homebase.
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
2-M
ar
4-M
ar
6-M
ar
8-M
ar
10-
Mar
12-
Mar
14-
Mar
16-
Mar
18-
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1-A
pr
3-A
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5-A
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7-A
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9-A
pr
11-
Ap
r
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Ap
r
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r
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1-M
ay
3-M
ay
5-M
ay
7-M
ay
9-M
ay
11-
May
13-
May
Number of Hourly Employees Working
Colorado Florida Georgia New York Tennessee Texas
April 1:
Florida: -54%
Colorado: -54%
Tennessee: -50%
Georgia: -52%
Texas: -51%
New York: -71%
May 14:
Florida: -43%
Colorado: -37%
Tennessee: -29%
Georgia: -37%
Texas: -35%
New York: -63%
Georgia,
Colorado,
Tennessee
reopen
Texas reopens
Florida reopens
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Federal Spending package of $2 trillion, likely to need another package of $1-2 trillion
CARES Act Provides Fiscal Support
ECONOMIC & MARKET OUTLOOK
Target GroupEstimated
Amount
Enough?
1 Month 2-3 Months
Consumers $270 bn
Unemployed workers $250 bn
Small Businesses $377 bn
Strategic Industries $100 bn
Healthcare System $100 bn
State and Local Governments $150 bn
Federal Reserve $450 bn
Source: CNR Research.
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$ trillion
$1 trillion
$2 trillion
$3 trillion
1 Monthof Lost Productivity
2 Monthsof Lost Productivity
3 Monthsof Lost Productivity
Crisis Fiscal Spending
Crisis Fiscal Spending Covers Through May
Bridging Months of Economic Losses Fiscal spending should be sufficient to provide a bridge through the main part of the crisis.
More stimulus though is likely needed as the economy starts to reopen.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, CNR Research. For illustrative purposes. Monthly lost productivity assumed to be 50% of U.S. monthly GDP. Crisis fiscal spending
includes $2 trillion from the CARES Act and $484 billion from a subsequent spending bill.
Month 1 Month 1
Month 2
Month 1
Month 2
Month 3
95% of
estimated loss
over 3 months
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Facing Elevated Risks, Lenders Retreat
Banks pull back lending due to high unemployment and economic uncertainty.
Despite low interest rates, credit unavailable to many consumers.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, CNR Research.
120
130
140
150
160
170
180
190
200
1/1/2015
3/1/2015
5/1/2015
7/1/2015
9/1/2015
11/
1/2015
1/1/2016
3/
1/
2016
5/1/2016
7/1/2016
9/1/2016
11/1/2016
1/1/2017
3/1/2017
5/
1/
2017
7/1/2017
9/1/2017
11/1/2017
1/1/2018
3/1/2018
5/1/2018
7/1/2018
9/1/2018
11/
1/2018
1/1/2019
3/1/2019
5/1/2019
7/1/2019
9/1/2019
11/1/2019
1/
1/
2020
3/1/2020
Mortgage Credit Availability
-16%
in March
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Not a Banking Crisis… Yet
Post-financial crisis capital requirements have made banks much safer.
Currently no expectation of 2008-like bank solvency issues.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, CNR Research. Bank default risk reflects average CDS spread of global systemically important financial institutions as listed in 2019
by the Financial Stability Board, except the Agricultural Bank of China and Group BPCE, which were excluded for data availability reasons.
0
200
400
600
800
1000
1200
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bank Default Risk
13
0
10
20
30
40
50
60
70
80
0
100
200
300
400
500
600
700
800
900
WT
I C
rud
e P
rice
Us
Oil
Rig
s O
per
atin
g
Drop in prices due to reduced demand and OPEC+ price war.
Despite recent OPEC+ deal, lack of demand keeps prices low.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, CNR Research.
Typical breakeven price
(U.S. producers)U.S. Oil Rigs Operating
WTI Crude Price
Drop in Oil Prices = Lost Jobs and Investment, Higher
Defaults
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Low Commodity Prices Remove A Key Component of
Inflation U.S. Treasury Yields have high correlation with crude oil.
Persistently low energy prices tend to pull inflation down.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0
10
20
30
40
50
60
70
80
90
Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19 Oct-19 Feb-20
10-Y
ear
US T
reas
ury
Yie
ld (%
)
Bre
nt
Cru
de
Pri
ce
Brent Crude 1st Oil Future vs. US 10-Year Treasury
Brent Crude (LHS)
10-Year US Treasury (RHS)
15
Global Synchronized Downturn
COVID-19 has delivered an unprecedented shock to the global economy with most major and
emerging economies falling into recession over the first half of 2020.
ECONOMIC & MARKET OUTLOOK
Source: IMF.
-10
-8
-6
-4
-2
0
2
4
6
8
10
World United States Advancedeconomies
Euro area Germany Italy Japan Spain China EmergingAsia
Emergingeconomies
2019 2020 2021
-8
-6
-4
-2
0
2
4
6
8
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
IMF GDP Forecasts
World Advanced economies Emerging economies
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China Showing Signs of Recovery
ECONOMIC & MARKET OUTLOOK
Source: Goldman Sachs Investment Research.
0%
20%
40%
60%
80%
100%
120%
Overall Mining Manufacturing Utilities Construction Transportation Hotel, catering Real estate Culture, sports,entertainment
Chinese Activity vs. 2019 Level
February March (Week ending March 20) April (Week ending April 10)
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Global Fiscal Response U.S. has taken most decisive fiscal actions.
Some European countries require significant additional relief.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, Goldman Sachs Investment Research.
*Europe represents average of 4 major European economies: France, Germany, UK, and Italy
China data reflects Goldman Sachs forecast of deficit expansion.
0%
2%
4%
6%
8%
10%
12%
14%
16%
US 2008-2009 US 2020 Europe* Japan China
Discretionary Fiscal Easing (% of GDP)
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Global Monetary Policy Response
Global central banks have taken significant actions to support economies.
Most have lowered rates, purchased bonds and directly financed companies.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, Goldman Sachs Investment Research.
0%
5%
10%
15%
20%
25%
30%
US Federal Reserve(2008-2015)
US Federal Reserve(2020)
European CentralBank
Bank of England Bank of Japan
Change in Central Bank Assets as % of GDP
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Elements could be available starting in May/June:
What do we need to get back to normal?
ECONOMIC & MARKET OUTLOOK
Source: CNR Research.
More, better testing
Framework for identifying and isolating cases
COVID-19 “Passport” to return to work
Digital
COVID-19 Alert (iPhone/Android)
Testing at every CVS, McDonalds,
Starbucks, etc.
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One Step at a Time
ECONOMIC & MARKET OUTLOOK
Slow the Spread
• Physical distancing and stay-at-home orders
• Closed schools, public venues, restaurants, etc.
• Build hospital capacity
State-by-State
Reopening
• Need to see: reduced cases, increased testing and tracking
• Incremental lifting of social distancing measures
• Identify and track cases and immunity
Establish Protection, Lift All Restrictions
• Need to see: vaccine developed and approved
• Widespread vaccinations
• Remove remaining precautions
Present –
May/June
May/June –
Spring 2021
Spring 2021 -
Source: Gottlieb, S., Rivers, C., McClellan, M, Silvis, L., Watson, C.,;“National coronavirus
response: A road map to reopening“; American Enterprise Institute; March 29, 2020.
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Industry Recoveries Will Vary
ECONOMIC & MARKET OUTLOOK
Source: CNR Research, Womply.
Industry CurrentProjected Recovery
Month 1-2 Month 3+
Air Travel
Hotels
Theatre and Sports
Restaurants
Drive Through Restaurants
Auto Sales
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Consumers Will Prioritize Spending as We Normalize…
ECONOMIC & MARKET OUTLOOK
Travel & Hotels
Luxury Goods
Cars
Retail
Restaurants
Entertainment
E-Commerce
Home Entertainment
Groceries
Low Priority
High Priority
23
…as Will Businesses
ECONOMIC & MARKET OUTLOOK
Business Travel
Production Infrastructure
Cloud –Based Software
Communication Services
Low Priority
High Priority
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We don’t expect real
returns to be moderate,
with higher volatility
over the next few
quarters.
Asset Class Performance
ECONOMIC & MARKET OUTLOOK
Source: FactSet. As of April 30, 2020. Total returns include dividends reinvested.
Equities
Fixed Income
Real Assets
-5% 0% 5% 10% 15% 20% 25%
Bloomberg Commodity Index
Brent Oil
Corp. EM Bonds (J.P. Morgan CEMBI)
Bloomberg Barclays U.S. Aggregate
Bloomberg Barclays U.S. High Yield Corporate
Bloomberg Barclays Municipal HY
S&P/LSTA U.S. Leveraged Loan 100
S&P U.S. Treasury Bond 10-Year Index
MSCI EM Asia
MSCI EAFE
MSCI Europe
Nasdaq-100
Dow Jones Select Dividend Index
China Shanghai
S&P Small Cap 600
S&P 500 (TR)
Asset Class Returns1YR
3YR
25
Critical Conditions Speedometers
Covid
Conditions
Equity
Market
Conditions
Credit
Market
Conditions
Re-opening
Spread /Mortality Testing Masks/PPE Vaccine
Fiscal ResponseOutlook Employment
Fear
Re-opening Outlook
EPS Outlook
Credit Spreads Monetary Response
Re-opening Outlook
Liquidity Demand
ValuationFinancial Conditions
Economic
Conditions
ECONOMIC & MARKET OUTLOOK
Source: City National Rochdale. As of May 2020.
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Critical Conditions Scorecard
Key talking points
> Cash deployment is a function of the
COVID-19, Economic, equity and Bond
indicators and the confidence in the
persistence of the score
Override examples
> Vaccine discovered today, buy the
market, whatever level
> If SPX at levels we might deploy cash
and second wave is faster and more
deadly, worst case probabilities increase
keep cash
Indicator Score AVG.
COVID-19
Spread/mortality 7.5
6.0Testing 6.0
Masks/PPE 7.0
Vaccine 3.5
Economy
Outlook/GDP 3.0
4.6Employment 3.0
Reopening Status 4.0
Fiscal response 8.5
Equity
Fear 5.5
4.5Financial conditions 5.5
Valuation 3.5
EPS outlook 3.5
Bonds
Credit Spreads 4.5
6.6Monetary Response 9.0
Liquidity 5.0
Primary Market Demand 7.8
Weighted Score 5.4
Negative 0-4
Neutral 4-6
Positive 6-10
ECONOMIC & MARKET OUTLOOK
Source: City National Rochdale. As of May 2020.
27
First Bear Market Rally is Rarely the Last
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, CNR Research.
Bear Market Peak to Trough Biggest RallyRally Peak to
Market Bottom
1966 -22% +7% -9%
1968-1970 -36% +6% -23%
1973-1974 -48% +8% -38%
1980-1982 -27% +11% -14%
1987 -33% +15% -13%
2000-2002 -49% +21% -32%
2007-2009 -57% +18% -33%
2020 -34% +30% ?
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-2
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
St. Louis Fed Financial Stress Index
Financial Conditions Have Eased, but Still Worse Than
Normal Monetary and Fiscal Policy impact clearly positive.
Not out of the woods yet.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg.
2008 peak
2020 peak
Current
29
Overwhelmingly companies are suspending or lowering 2020 guidance
Earnings uncertainty remains high
ECONOMIC & MARKET OUTLOOK
Source: CNR Research.
-20%-27%
-40%
40%
25%20%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2020(Optimistic)
2020(Base Case)
2020(Pessimistic)
2021(Optimistic)
2021(Base Case)
2021(Pessimistic)
150
160
170
180
190
200
210
220
5/10/201
9
5/17/201
9
5/24/201
9
5/31/201
9
6/07/201
9
6/14/201
9
6/21/201
9
6/28/201
9
7/05/201
9
7/12/201
9
7/19/201
9
7/26/201
9
8/02/201
9
8/09/201
9
8/16/201
9
8/23/201
9
8/30/201
9
9/06/201
9
9/13/201
9
9/20/201
9
9/27/201
9
10/
04/
2019
10/
11/
2019
10/
18/
2019
10/
25/
2019
11/
01/
2019
11/
08/
2019
11/
15/
2019
11/
22/
2019
11/
29/
2019
12/
06/
2019
12/
13/
2019
12/
20/
2019
12/
27/
2019
1/03/202
0
1/10/202
0
1/17/202
0
1/24/202
0
1/31/202
0
2/07/202
0
2/14/202
0
2/21/202
0
2/28/202
0
3/06/202
0
3/13/202
0
3/20/202
0
3/27/202
0
4/03/202
0
4/10/202
0
4/17/202
0
4/24/202
0
5/01/202
0
5/08/202
0
Consensus 2021 S&P 500 Earnings Forecast
-15%
30
Stocks Continue to be Expensive
ECONOMIC & MARKET OUTLOOK
Source: CNR Research.
S&P 500 Forward Price/Earnings Ratio
Overvalued
Fairly Priced
Attractive
Very Attractive
2.47
2.57
2.67
2.77
2.87
2.97
3.07
1992 1994 1996 1998 1999 2001 2003 2005 2006 2008 2010 2012 2013 2015 2017 2019
18
24
16
14
10
31
The largest stocks now make up more than 17% of the S&P 500
Highly Concentrated Market
ECONOMIC & MARKET OUTLOOK
Source: FactSet, CNR Research. 2020 data reflects the end of April 2020.
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Weight of Largest 5 Companies in the S&P 500
32
We have not seen a market nearly this concentrated in 20 years
Assessing Concentrated Markets
ECONOMIC & MARKET OUTLOOK
Source: FactSet, Bloomberg. Weight in S&P 500 during in top chart reflects average weight
between Sept 1997 and March 2000. Weight in S&P 500 in bottom chart reflects avg. weight
between March 23 and May 4, 2020.
Weight in
S&P 500
Returns P/E Ratio Return
Sept 1998 - Mar
2000
March 30,
2000
Mar 2000 -
July 2002
Microsoft Corporation 4% 88% 65x -54%
General Electric Company 3% 103% 47x -37%
Intel Corporation 2% 197% 55x -70%
Cisco Systems, Inc. 2% 376% 364x -82%
Walmart Inc. 2% 117% 46x -16%
Company Weigh in the S&P 500Returns
March 23 - May 4, 2020
P/E Ratio
May 4, 2020
Microsoft Corporation 6% 32% 32x
Apple Inc. 5% 31% 23x
Amazon.com, Inc. 4% 22% 111x
Facebook, Inc. 2% 39% 25x
Johnson & Johnson 2% 33% 23x
1998 – 2002:
2020:
33
Equity Market Areas to Focus On and Avoid
ECONOMIC & MARKET OUTLOOK
Source: CNR Research.
Business CategoryBenefit from
Normalization
Secular
Grower
Strategically
Important
Food Retailers ● ● ●
E-Commerce ● ● ●
Equipment for Hospitals ● ● ●
Pharmaceuticals ● ● ●
Consumer Technology ● ● ●
Internet and Wireless Access ● ● ●
Cloud-Based Software ● ● ●
Energy ●
Materials ●
Leisure-Related
34
Despite recent underperformance, high dividend stocks have provided higher total return
High Dividend Equities Provide Income and Return
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg. Data as of April 30, 2020. High dividend stocks represented by the S&P
High Yield Dividend Aristocrats Index. Investment Grade Bonds represented by the
Bloomberg Barclays Intermediate Corporate Bond Index.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2008-2009 Financial Crisis Decade Following Financial Crisis(annualized)
2020 YTD 20 Years
Performance Across Environments
High Dividend Stocks Investment Grade Bonds
35
High dividend stocks provide favorable income amid low interest rates
ECONOMIC & MARKET OUTLOOK
Source: FactSet.
2%
4%
0%
1%
2%
3%
4%
5%
Investment Grade Bond Yields High Dividend Stock Yields
Yield Comparison High Dividend Stocks vs. Investment Grade Bonds
Low Interest Rate Bonds < High Dividend Yield Stocks
36
Non-Investment Grade Yields are Favorable
Investment grade corporate bond yields have reverted to pre-crisis levels.
Potential opportunities for added income and return in non-investment grade.
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg. US High Yield Corporate Bonds: Bloomberg Barclays US Corporate High Yield Index,
Emerging Market Corporate Bonds: ICE BofA Emerging Market High Yield Corporate Bond Plus Index, US
Investment Grade Corporate Bonds: Bloomberg Barclays US Agg Corporate Index, US Senior Secured
Loans: S&P/LSTA Leveraged Loan 100 Index. US CLOs: Palmer Square CLO Debt Index.
2.8
5.25.6 5.8
6.6
2.8
7.97.5
7.1
9.8
0
2
4
6
8
10
12
US Investment GradeCorporate Bonds
US High Yield CorporateBonds
US Leveraged Loans US CLOs Emerging MarketCorporate Bonds
Yields: Current vs. Pre-Crisis
12/31/2019 5/11/2020
37
Opportunities in Non-investment Grade Fixed Income
ECONOMIC & MARKET OUTLOOK
Source: CNR Research. Bloomberg. High Yield Bond performance and credit spreads reflect the
average option-adjusted spread of the Bloomberg Barclays US Corporate High Yield Index.
0%
5%
10%
15%
20%
25%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
High Yield Bond Credit Spreads
End March: 9%
High Yield avg. annual returns over periods after spreads exceeded 9%
1 Year 3 Years 5 Years
Average Return 34.7% 19.6% 15.3%
Worst Return 0.5% 11.8% 9.7%
38
We may see opportunities with bonds that have dropped significantly where businesses can pay their bills through the crisis.
High Yield Bond Favorites
ECONOMIC & MARKET OUTLOOK
Source: Bloomberg, CNR Research. Examples are meant to be illustrative of current
market conditions in the U.S. high yield bond market.
Fast Food Ride SharingEnergy
Company
Price Decrease -27% -17% -50%
Yield 14% 9% 24%
Industry Fast Food Transportation Energy
COVID-19 Impact
Cash Reserves
Outlook for Rebound
39
Opportunities and Risks in the Municipal Markets
ECONOMIC & MARKET OUTLOOK
Source: CNR Research.
Investment Grade Muni
What we like:
• High quality state governments
• Essential service revenue bonds
• Cities supported by CARES Act
What we don’t like:
• States with severely underfunded pensions
• Higher education reliant on foreign students
• Bonds backed by user fees (e.g. dorms, parking facilities, stadiums, toll roads)
High Yield Muni
What we like:
• Regional hospital systems deemed “essential”
• Tobacco settlement bonds
• Certain community development districts
What we don’t like:
• Certain senior living facilities
• Small private higher education
• Alternative energy
40
Municipals: Focus on High Quality States
ECONOMIC & MARKET OUTLOOK
Source: CNR Research.
Top 5 States (Credit Quality)
Rank StateDays Cash on
Hand
Population
Growth
Pension
Liability/Revenue
1 Utah 185 14% 8%
2 Tennessee 107 7% 4%
3 Washington 124 12% 7%
4 Oregon 116 9% 11%
5 Minnesota 152 6% 6%
Bottom 5 States (Credit Quality)
Rank StateDays Cash on
Hand
Population
Growth
Pension
Liability/Revenue
46 Louisiana 98 3% 20%
47 New Jersey 56 1% 157%
48 Rhode Island 31 1% 50%
49 Illinois 48 -1% 194%
50 Kentucky 37 3% 95%
41
CNR COVID-19 Crisis Playbook
ECONOMIC & MARKET OUTLOOK
Past performance is not indicative of future results, and forward looking statements may not come true or materialize
Statements regarding individual client allocations are based on guidelines set forth by City National Rochdale’s Asset Allocation Committee and
may not have been implemented for all client accounts.
Over the past year
Moved to higher quality and defensive holdings in US fixed income and
equity
Reduced developed markets, small cap, and high yield
Over the past 2 months Increased cash levels
Monitoring event dashboard for further portfolio adjustment
Currently considering
Stock market rally
Impact on business revenues and profits
Massive government and central bank actions
Buying stocks in solid industries
Buying bonds in resilient sectors
42
CNR COVID-19 Crisis Playbook In Action
ECONOMIC & MARKET OUTLOOK
Asset Class Recent Changes
U.S. Large Cap Equities
• Focusing on balance sheet strength. Targeting lower P/E, higher quality, franchise stocks.
• Reduced exposure to cyclical sectors with high earnings risk. Favorite areas include software and
services, health care equipment and consumer staples.
• Limited exposure to the sectors impacted the most by the COVID-19 virus like Airlines, Hotels &
Resorts, Cruise Lines, Casinos & Gambling, Restaurants, and Non Consumer Staples Retail.
U.S. Mid/Small Cap Equities • Reduced to max underweight.
Dividend & Income Equities
• Focus on companies that can maintain their dividends, with solid cash flows and an emphasis on
“essential service” companies.
• Targeting companies with strong balance sheets and opportunity for growth later in a recovery economic
cycle. Have moved out of energy names and banks for now.
International Equities• Reduced DM exposure to max underweight.
• Favor domestically focused EM Asia equities.
Core Fixed Income• Favor defensive sectors but look for opportunities in oversold areas.
• Target neutral to long duration as rates likely to remain low for an extended period.
Opportunistic Fixed Income• Favor U.S. High-Yield above international and EM.
• Reduce exposure to energy and trade reliant EM.
• Favor secured bank loans and investment grade CLO tranches.
Alternative Investments• Recommending non-correlated diversification options in less-liquid areas of the market, which can
provide high yields, strong fundamental quality and price stability, as well as boost long-term
performance (CLOs, reinsurance, capital leasing investments, etc.).
Cash• Raised allocation weight to around 15% to provide insurance against further market declines or shocks,
and reposition portfolios for the eventual recovery.
43
Short, but Severe Recession Ahead
U.S. economy set for
short, but severe
recession before
containment measures
are lifted and growth
slowly begins to recover
over the second half of
2020.
Indicator Status Level
Leading IndicatorsLeading indexes suggesting the U.S. economy will be facing a short but very deep contraction near term, followed by a
slow recovery.4.0
Labor Market
Job losses look set to take the unemployment rate to post war high of 15-20%. As the economy re-opens, we expect the
unemployment rate to drop back faster than it would in a normal recovery, since many workers will be recalled from
temporary layoffs, but a full recovery of job losses may take several years.
3.0
Consumer SpendingThe pandemic is expected to cause a severe decline in consumption in the second quarter. Although spending should
rebound quickly once the virus is brought under control, it could take a long time to return to its previous trend. 4.0
Global Economic
Growth
COVID-19 has delivered an unprecedented shock to the global economy, with most major and emerging economies
falling into recession over the first half of 2020. 3.0
Monetary Policy Swift and decisive action by the Fed has been unprecedented in scale, helping to improve liquidity and stabilize markets. 9.0
Fiscal PolicyPolicy response has been massive and well-targeted, but more is needed. Total stimulus passed this year could rise to $4tn
or 20% of GDP. 8.0
Consumer SentimentConfidence measures posting record declines, with further deterioration expected as households adjust to a slower
expected pace of the economic recovery.3.5
Credit
Availability/Demand
Despite lower interest rates and policy intervention, economic uncertainty is reducing both the willingness and ability to
lend and borrow. 5.0
Geopolitical
Risks/Contagion
Coronavirus pandemic is adding to a long list of worries, including trade policy missteps, European political/financial
system stability, energy production disputes and other unforeseen circumstances that have the potential to disrupt
markets and shake confidence.
4.0
Business InvestmentAlready weak capex spending set for further declines in face of uncertain economic backdrop, lower demand, business
closures and declining capacity utilization.2.5
Service SectorSurvey measures are pointing to sharp declines with social distancing measures temporarily bringing activity in sectors
like travel, accommodation and restaurants to a near-complete halt. Measured normalization process will slow recovery.3.5
Manufacturing SectorWeakness being exacerbated by fallout from COVID containment measure. Sector set for prolonged downturn with
sinking global demand and stronger dollar, as well as continued trade uncertainty.3.0
Housing
Housing activity has slowed because of lockdowns and rising household financial uncertainty. Despite lower mortgage
rates, lenders are battling economic uncertainty by raising standards, requiring higher down payments, and even
eliminating certain loan types.
5.0
Inflation
The collapse in energy prices means that CPI inflation will temporarily fall below zero in the coming months, but we
anticipate only a modest easing in core inflation. Core inflation is likely to remain muted for the next several years
although we think the risk of a slide into a widespread deflation remains low.
7.5
Energy Damage in energy sector from the collapse in oil prices starting to increasingly offset positive tailwind to households. 6.5
Total Score 4.0
ECONOMIC & MARKET OUTLOOK
City National Rochdale U.S. Economic Monitor
Source: City National Rochdale. As of May 2020.
Positive
6.0 to 10
Improving outlook, confluence of positive
indicators, recession probability low
Neutral
4.0 to 5.9
Steady but sluggish growth,
mixed economic signals
Negative
0 to 3.9
Weak economic growth, decelerating
trends, recession a distinct possibility
44
INDEX DEFINITIONS
The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group
representation to represent U.S. equity performance.
MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging
markets.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance
of developed markets, excluding the U.S. & Canada. As of June 2007, the MSCI EAFE Index consisted of the following 21 developed market country indices:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of
September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.
The MSCI World is a market cap weighted stock market index of 1,655[1] stocks from companies throughout the world. The components can be found here.[2] It is
maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for 'world' or 'global' stock funds intended to represent a
broad cross-section of global markets.
The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on
telephone surveys that gather information on consumer expectations regarding the overall economy.
The Barclays Aggregate Bond Index is composed of U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one
year or more.
The Barclays High Yield Municipal Index covers the high yield portion of the U.S.-dollar-denominated long-term tax-exempt bond market. The index has four main
sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
The Bloomberg Barclays U.S. Treasury Index is an unmanaged index of prices of U.S. Treasury bonds with maturities of one to 30 years.
The Bloomberg Barclays U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with
maturities of one year or more.
The Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged, U.S.-dollar-denominated, nonconvertible, non-investment-grade debt index. The index
consists of domestic and corporate bonds rated Ba and below with a minimum outstanding amount of $150 million.
The Bloomberg Barclays Emerging Markets USD Aggregate Index tracks total returns for external-currency-denominated debt instruments of the emerging markets.
Countries covered are Argentina, Brazil, Bulgaria, Ecuador, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Russia, and Venezuela.
The Bloomberg Barclays U.S. Agency Bond Index is a rules-based, market-value-weighted index engineered to measure investment-grade agency securities publicly
issued by U.S. government agencies. Mortgage-backed securities are excluded.
S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads, and interest payments.
The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the U.S. market that seeks to mirror the market-weighted
performance of the largest institutional leveraged loans, as determined by criteria. Its ticker on Bloomberg is SPBDLLB.
Index Definitions
45
INDEX DEFINITIONS
The Dow Jones Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally
consists of 100 dividend-paying stocks that have five-year non-negative Dividend Growth, five-year Dividend Payout Ratio of 60% or less, and three-month average
daily trading volume of at least 200,000 shares.
The Bloomberg Commodity Total Return Index, formerly known as Dow Jones-UBS Commodity Index Total Return (DJUBSTR), is composed of futures contracts and
reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13-week
(three-month) U.S. Treasury Bills.
The Corporate Emerging Market Bond Index (CEMBI) is J.P. Morgan's index of U.S.-dollar-denominated debt issued by emerging market corporations.
The Standard & Poor’s Small Cap 600 Index (S&P 600) measures the small-cap segment of the U.S. equity market. The index is designed to track companies that
meet specific inclusion criteria to ensure that they are liquid and financially viable.
Nasdaq 100 Index is an index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange.
The U.S. Treasury 10-year Note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury Note pays interest at a fixed
rate once every six months and pays the face value to the holder at maturity.
The Shanghai Stock Exchange (SSE) composite is a market composite made up of all the A shares and B shares that trade on the Shanghai Stock Exchange.
Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as
light because of its relatively low density, and sweet because of its sulfur content.
Employment Index: U.S. jobs with the exception of farmwork, unincorporated self-employment, and employment by private households, the military, and intelligence
agencies.
A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI is a
statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.
The “core” PCE price index is defined as personal consumption expenditures (PCE), prices excluding food and energy prices. The core PCE price index measures the
prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation.
The S&P/Case-Shiller Home Price Indexes are a group of indexes that track changes in home prices throughout the United States. The indexes are based on a
constant level of data on properties that have undergone at least two arm's length transactions.
The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute for Supply Management (ISM). The ISM Manufacturing Index
monitors employment, production, inventories, new orders and supplier deliveries. A composite diffusion index monitors conditions in national manufacturing and is
based on the data from these surveys.
The ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors
across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business
Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.
Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.
Index Definitions (continued)
46
IMPORTANT DISCLOSURES
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.
The material contains forward-looking statements regarding intent, beliefs, or current expectations which are used for informational purposes only and do not reflect
actual results. These statements are based primarily upon a hypothetical set of assumptions applied to certain historical financial information that 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. The opinions, projections, forecasts, and forward-looking statements expressed are also valid as on the date of this document and are subject to change
based on market and other conditions
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond.
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.
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.
Investing in international markets carries 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. Emerging markets can have greater custodial and
operational risks, and less developed legal and accounting systems than developed markets.
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.
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.
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.
Yield to Worst – 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.
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. Emerging markets bonds can have greater custodial and operational risks, and less
developed legal and accounting systems than developed markets.
Important Disclosures
47
IMPORTANT DISCLOSURES
Investments in commodities can be very volatile, and direct investment in these markets can be very risky, especially for inexperienced investors.
Returns include the reinvestment of interest and dividends.
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.
Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees and other expenses.
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.
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.
Estimated returns are based on multiple sources of historical market index data input into proprietary quantitative models specific to each asset class (e.g., equity,
fixed income, etc.), then adjusted for fundamental inputs such as yield, earnings growth, risk premiums, valuation, historical reversion, and market implied
expectations. Finally, we further adjust the estimated returns with our economic forecasts on market conditions and long-term expectations (which include economic
growth, inflation, interest rates, among other important inputs).
Performance does not represent the results of actual trading, but was achieved by means of retroactive application of a model designed with the benefit of hindsight.
Results may not reflect the impact that material economic and market factors might have on the adviser’s decision-making if adviser were actually managing client
assets.
This document may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market 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. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of City National
Rochdale or 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.
Important Disclosures (continued)
48
IMPORTANT DISCLOSURES
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.
References to indexes and benchmarks in hypothetical illustrations of aggregate returns do not reflect the performance of any actual investment. Investors cannot
invest in an index and such returns do not reflect the deduction of the advisor's fees or other trading expenses. There can be no assurance that current investments
will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related
transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios as they have different
underlying investments and may use different strategies or have different objectives than our strategies or funds.
Important Disclosures (continued)
49
For More Information
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