City National Bank
talk with us:
(800) 773-7100

Anxiety on the Rise

March 18, 2014

Bruce Simon
Chief Investment Officer
City National Rochdale

Print Friendly

Global equity markets are struggling so far in 2014 as investors grapple with three disturbing trends: 1) Russia’s military occupation in Crimea; 2) decelerating growth in China; and 3) persistent concerns about the strength of the U.S. economic expansion. With investors anxious to protect last year’s stock market profi ts, how signifi cant are these developments?

Th e S&P 500 fell 2.0% last week, wiping out the strong February gains and leaving the broad stock market index at approximately fl at for the year. With political and economic unrest accelerating in so many parts of the world (think Ukraine, Argentina, Venezuela, Iran, Syria, Th ailand, and the China/Japan dispute, to name a few), it is no wonder that anxiety is on the rise. In a risky world, investors typically head for the safe haven of U.S. Treasury bonds, and last week was no diff erent. Th e 10-Year U.S. Treasury note fell 15 basis points, dropping its yield to 2.65%.

The most likely outcome of the crisis in Ukraine is a negotiated settlement between Russia, Ukraine, the United States, and the European Union that addresses the dispute over Crimea and resolves a number of other outstanding points of contention. Unless Russia ups the ante by forcing a military confrontation in Eastern Ukraine or fomenting a Ukrainian civil war, they are likely to face only modest economic sanctions from Europe and the U.S., despite all the tough talk from Western leaders.

It is important to remember that the imposition of tougher economic sanctions on Russia will likely incite their own retaliatory measures. Th is could include an embargo on gas exports to European countries that are entirely dependent on Russian gas for their energy needs. Such an escalation would have very damaging eff ects on the entire global economy, and therefore we believe (and hope) that the risks are perceived by both sides as being too great. However, given President Putin’s unpredictable behavior so far, the probability is likely greater than zero.

Recent economic data out of China has been disappointing, including weak manufacturing activity, a sharp decline in exports, and concerns about too much debt and excess capacity. Th e MSCI China Index has fallen about 8.5% this year as a result. At the same time, Chinese infl ation is slowing sharply (only 2.0%), providing ample room for Chinese authorities to stimulate economic growth through more aggressive monetary policy. Our view is that China’s growth will moderate, but the fears of a “hard landing” in China are overblown. Importantly, China’s gradual transition to a more consumer-led economy is creating pockets of opportunity despite the deceleration in overall growth.

Finally, the nasty weather experienced by most parts of the United States over the last several months has muddled the economic picture. Economists have debated the precise impact of the weather, but it may take several more weeks to gauge its real impact. However, the solid growth in jobs reported in February was the fi rst indication that the weather did understate the true health of the economy. We continue to look for signs of economic acceleration as we move into the spring and summer months.

Individual investors are often swayed by the hyperbole of today’s 24-hour news cycle. While we do not discount the dangers inherent in the world today, oftentimes it is this anxiety which creates investment opportunity.

Investment and Insurance Products:
• Are Not insured by the FDIC or any other federal government agency
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
• May Lose Value

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 thirdparty 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 on the date of this document and are subject to change.

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly-owned subsidiary of City National Bank.

Subscribe to Market Perspectives

Market Perspectives is a brief, bi-weekly commentary on economic and market conditions from our Chief Investment Officer. Fill out the form below to subscribe.