Quarterly Update

Jan. 2019

Matthew Peron, Chief Investment Officer, Senior Managing Director | Jan. 2019

There Will Be Growth in the Spring

Economic fundamentals remain positive

Corrections are normal in bull markets

City National Rochdale portfolio strategies have defensive tilt

2018 was the most challenging year for equity investors since the financial crisis. After climbing to a record high in September, a volatile fourth quarter left the U.S. stock market in the red for the first annual decline in a decade. The weakness was widespread, with nearly every global region and most stocks delivering negative returns. But it wasn’t only equities that suffered. The risk-averse mentality of investors pervaded almost all asset classes. In fact, last year was the first since 1972 when none of the major asset classes generated a total return greater than 5%.

For some time now, we have deployed a defensive tilt in our strategies. Our equity and fixed income research teams have made deliberate risk-mitigating decisions to help fortify client portfolios for later stage business cycle conditions and rising volatility, while also leaving them well positioned to take advantage of a continuing positive investment environment.

The degree of the recent sell-off in equities was surprising, even to us. In contrast, corporate bond markets were relatively, and reassuringly, resilient. Indeed, with stock declines toeing the edge of bear-market territory in December, we couldn’t help being reminded of the famous scene from the 1979 film Being There. Amid concerns about faltering economic growth, the movie’s main protagonist, Chauncey, reassures the President: “As long as the roots are not severed, all is well.”

Markets now seem to have regained some of their footing, though it may be too soon to call the recent correction process over. Trade disputes, tighter Fed policy, political uncertainty, and weaker global growth have created a more balanced ledger of risks than we’ve experienced in many years. Yet, amid all the worries, we too find reassurance in that the economy’s roots remain strong.

Market corrections can be very painful, trying the confidence of even the most hardened and seasoned investors. But it should not be forgotten that they are also normal. Since March 2009, we have experienced seven corrections, averaging a 13.0% decline. In fact, the recent drop is not uncharted territory for this expansion. Amid the Eurozone debt crisis and U.S. economic fears in 2011, stocks at one point fell 19.4%, only to rebound 33% over the next 12 months.

Similarly, we believe the fundamental investment backdrop today is more favorable than recent equity moves and headlines might suggest. Economic growth and corporate earnings may be slowing, but they are still growing and our most reliable leading indicators and SpeedometersSM are signaling that they should keep doing so for at least the next several quarters.

Meanwhile, we believe markets have now priced in much of investor anxiety. Based upon consensus expectations for 2019 earnings growth, the S&P 500 was trading at 14.4 times earnings at year-end, a meaningful discount from the 15-year median of 16.5. Other valuation measures, including the relative attractiveness of stocks versus bonds, also appear much more favorable.

The unsettled markets carrying into 2019 are reacting to new economic and political realities, and expectations for global growth and corporate profits are being recalibrated. Our rigorous investment process has led us to stay the course over this normal weighing process and not overreact. It may take time but, as we have seen several times before in this cycle, markets eventually reconnect to positive fundamentals. To quote Chauncey one more time, as long as the roots are well: “There will be growth in the spring” (and beyond).


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Key Points

Economic fundamentals remain positive

Corrections are normal in bull markets

City National Rochdale portfolio strategies have defensive tilt

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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.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

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 Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

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

Investments in emerging market 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 market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

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.

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

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