boutique investment management services - may 2020 economic … · 2020-05-20 · economic outlook...

1

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.

3

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%


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.

4

Raise Cash to Manage and Mitigate Risk


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.


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

6

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.


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.

7

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.


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

8

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).


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-

Mar

20-

Mar

22-

Mar

24-

Mar

26-

Mar

28-

Mar

30-

Mar

1-A

pr

3-A

pr

5-A

pr

7-A

pr

9-A

pr

11-

Ap

r

13-

Ap

r

15-

Ap

r

17-

Ap

r

19-

Ap

r

21-

Ap

r

23-

Ap

r

25-

Ap

r

27-

Ap

r

29-

Ap

r

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

9

Federal Spending package of $2 trillion, likely to need another package of $1-2 trillion

CARES Act Provides Fiscal Support


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.

10

$ 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.


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

11

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.


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

12

Not a Banking Crisis… Yet

Post-financial crisis capital requirements have made banks much safer.

Currently no expectation of 2008-like bank solvency issues.


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.



Typical breakeven price

(U.S. producers)U.S. Oil Rigs Operating

WTI Crude Price

Drop in Oil Prices = Lost Jobs and Investment, Higher

Defaults

14

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.


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.


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

16

China Showing Signs of Recovery


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)

17

Global Fiscal Response U.S. has taken most decisive fiscal actions.

Some European countries require significant additional relief.


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)

18

Global Monetary Policy Response

Global central banks have taken significant actions to support economies.

Most have lowered rates, purchased bonds and directly financed companies.


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

19

Elements could be available starting in May/June:

What do we need to get back to normal?



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.

20

One Step at a Time


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.

21

Industry Recoveries Will Vary


Source: CNR Research, Womply.

Industry CurrentProjected Recovery

Month 1-2 Month 3+

Air Travel

Hotels

Theatre and Sports

Restaurants

Drive Through Restaurants

Auto Sales

22

Consumers Will Prioritize Spending as We Normalize…


Travel & Hotels

Luxury Goods

Cars

Retail

Restaurants

Entertainment

E-Commerce

Home Entertainment

Groceries

Low Priority

High Priority

23

…as Will Businesses


Business Travel

Production Infrastructure

Cloud –Based Software

Communication Services

Low Priority

High Priority

24

We don’t expect real

returns to be moderate,

with higher volatility

over the next few

quarters.

Asset Class Performance


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



26

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



27

First Bear Market Rally is Rarely the Last



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% ?

28

-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.


Source: Bloomberg.

2008 peak

2020 peak

Current

29

Overwhelmingly companies are suspending or lowering 2020 guidance

Earnings uncertainty remains high



-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



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


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


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



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


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


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.


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


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


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



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



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


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


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


City National Rochdale U.S. Economic Monitor


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


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


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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