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Market Outlook: December 2020
Most equity investors likely experienced solid gains this year on the back of massive advanced economy monetary and fiscal stimulus. However, we think that most are likely to say good riddance to 2020 and ready for a new beginning with vaccines potentially coming to the global population’s rescue.
By no means are we out of the woods on COVID-19 with cases still rising across the U.S. and Europe (as well as many other economies), but financial markets often react ahead of forecasted events. While we are seeing regional lockdowns with loopholes (meaning the lockdowns are much less severe than in March and April), by spring of 2021 investors could be seeing a steady rollout of vaccines across the U.S. and other advanced economies. As advanced economies continue to recover, global trade volumes should rise sharply. Combined with a potential trade deal between the UK and the European Union and a new U.S. Administration that seems much more likely to use a multilateral approach to trade than tariffs (perhaps some tariffs are even removed), this should set the stage for increased capital expenditures and higher corporate profits, particularly in overseas markets. The latest projections from the International Monetary Fund suggest that world trade volumes in goods and services could rise by 8.0% year-on-year in 2021.
We expect the next few months to be difficult with COVID-19 cases potentially rising sharply though the spring. However, as Citi Private Bank’s Chief Investment Strategist, Steven Wieting wrote recently, COVID-19 is NOT an unstoppable trend. It may continue to distort the global economy heading into 2021 and even lead to a flat or slightly negative U.S. real GDP print in the first quarter, but it looks like there will be some return to normalcy by mid-year 2021 as vaccines are rolled out to the population broadly. Citi Private Bank’s Global Investment Committee (GIC) thinks this marks a turning point that further favors previously unloved sectors of financial markets as investors seek out the remaining pockets of value that will benefit from the new economic cycle.
Global Economy: Restless
Vaccines could release pent-up demand.
Our goal is not to rehash the hardships of 2020 as many of us have lived it firsthand, but rather to look at what the end of the COVID-19 pandemic might mean to the global economy and financial markets as pent-up consumers gradually return to some degree of normalcy.
The next couple of quarters may be difficult as COVID-19 continues to surge across many parts of the world, but there is hope. With several vaccines showing approximately 90% effectiveness in blocking infection in early clinical trials, optimism has grown that a broad distribution at warp speed may be able to provide the global population with “herd immunity” over time.
As it stands right now, three vaccine frontrunners could be granted emergency approval in developed markets in either December 2020 or January 2021. Assuming they are found to be safe and effective, they could produce billions of doses per year and lead to widespread vaccinations by year-end 2021. Citi’s economists believe that some form of herd immunity could be reached in developed markets by the fourth quarter of 2021. Lower-income emerging markets may have to wait until 2022.
The global economy could grow by 4.2% in 2021.
Barring an unforeseen roadblock, the distribution of these vaccines should enable the global economy to recover more quickly and robustly than during a traditional recession with the global economy in sound shape prior to COVID-19. The safety and soundness of financial institutions is more stable than during the Global Financial Crisis. Household balance sheets are relatively healthy and consumer confidence remains higher than in traditional recessions due to the robust monetary and fiscal policy responses from global policy makers. Citi Private Bank’s Chief Economist Steven Wieting believes that the global economy should rebound from an annual decline of -4.0% in 2020 to an annual growth rate of +4.2% in 2021. Several regions may outpace the United States (see figure 1).
Global trade volumes look likely to rise.
We believe this economic recovery will be accompanied by a notable rise in global trade volumes as COVID-19 cases fade (see figure 2). Combined with a new U.S. Administration that is likely to be more focused on multi-lateral trade agreements than tariffs, a potential United Kingdom trade deal with the European Union, and a low cost of capital, this could lead to increased capital expenditures starting in the second quarter of 2021 as companies use the lessons learned from the forced, rapid technology adaptation due to COVID-19 to better prepare for the future ahead. Our expectation is that the global economy will further transition from hurting to healing in the year ahead.
The IMF predicts that world trade volumes could rise by 8.0% in 2021.
Global Stocks: Seeking Value
Investors may look to sectors that have yet to fully recover.
The nature of COVID-19 accelerated trends that were already in place. So-called “Stay-at-Home” trends like cloud computing, telemedicine, teleconferencing, in-home entertainment, exercise equipment, and home repair were already in demand prior to COVID-19, but social-distancing measures further bolstered demand.
Even with COVID-19’s possible defeat in the years ahead, we don’t envision these trends as completely unwinding. However, the significant rise in technology valuations relative to other areas of the stock market argues for a potential rotation in investment portfolios (see figure 3). Looking ahead, we believe that investors will seek out opportunities in areas that are less richly priced and have yet to fully recover.
Technology outperformance may fade some in 2021 as COVID-19 impacted sectors recover.
Cyclical stocks like Industrials, Financials, and Small- and Mid-Capitalization stocks may have more room to run.
These areas will likely include assets that are most sensitive to the U.S. business cycle (known as cyclical stocks) and to COVID-19 dynamics. Potential areas of opportunity include Industrials, Financials, and Small- and Mid-Cap (or SMID) stocks globally. While these areas rallied sharply in November, we believe that they likely have further room to run. As figure 4 shows, the rotation into COVID-19-sensitive stocks (Airlines, Casinos, Industrials, Banks, etc.) began in mid-2020, but returns remain negative year-to-date in many cases. As the economy continues to normalize, we expect this rotation to continue with beaten-down sectors playing “catch-up” as the economy further reopens. However, this may play out in “fits and starts” and the strength of the rotation may start to fade as we enter spring and broad vaccine distribution becomes more fully priced in.
The rotation into Leave-My-Home stocks gained significant steam after vaccine developments were announced.
Outside of the United States, Citi Private Bank’s GIC envisions a similar scenario playing out over the next 12-to-24 months with investments overseas looking more attractive for a number of reasons. One reason is that emerging Asia, emerging Latin America, and emerging European stocks have lagged behind relative to China, but another reason is an expectation for further U.S. dollar depreciation. If the U.S. dollar continues to weaken as investors rotate into value stocks overseas and U.S. debt levels rise, then U.S. investors could benefit from appreciation in the foreign currency against the dollar when they sell their holdings and exchange the proceeds for dollars. Combined with an improving global trade backdrop (see figure 2 again), this should benefit non-U.S. equities in the coming year.
As a result, the GIC has added equity exposure to Japan large-cap stocks, Asia Ex-Japan large-cap stocks, Europe Ex-UK large-cap stocks, and UK large-cap stocks. Positions have also been increased in emerging market Asia Ex-China, Brazil, and emerging market EMEA (Europe, Middle East, and Africa).
Global Bonds: Closing the Gap
Interest rates may rise as the global economy normalizes amid additional stimulus.
Central banks stepped up as lenders of last resort for not only banks, but also financial intermediaries, and even nonfinancial corporations. Combined with a reduction in interest rates and large-scale purchases of government bonds (see figure 5), the actions helped financial conditions to recover rapidly after the onset of this global pandemic.
The monetary policy response to COVID-19 was much more significant than during the Global Financial Crisis.
Central banks remain accommodative and focused on narrowing the inequality gap that has widened during the global pandemic. This may limit the upside for rates.
Moving forward, global central bank and government policymakers will likely stay accommodative to ensure that lasting economic scarring is limited. As Secretary of Treasury nominee Janet Yellen recently said, “It’s an American tragedy and it’s essential we move with urgency. Inaction will cause a self-reinforcing downturn, causing yet more devastation. And we risk missing the obligation to address deeper structural problems.” Combined with a Fed Chair that remains focused on the potential economic downside, the risk of hawkish government policy responses seems quite low. However, a sudden shift in tone should the economy recover faster than anticipated could be a risk in the year ahead.
Importantly, most countries have reopened and many more people are flying, driving, and dining. This has led to a strong (though not yet complete) economic recovery. While some countries and regions have implemented social-distancing restrictions once again, they are nowhere near as severe as those implemented in March and April and should be viewed more as “lockdowns with loopholes” with manufacturing remaining open, construction remaining open, and in many cases, schools remaining open. This should help to support the ongoing economic recovery, though we may experience a soft patch in the next quarter or two.
Regardless, financial markets often react to expectations not current conditions. Citi’s proprietary U.S. economic surprise index, which measures whether economic data releases are beating or missing expectations, suggests that the recovery may be moderating as we move past the initial reopening surge, but the gap between U.S. Treasury yields and economic activity remains wide (see figure 6). As such, we envision sovereign bond yields drifting higher in the year ahead as both economic growth and inflation climb. This may limit returns in fixed income portfolios and is a key thesis of the GIC’s deep underweight in global fixed income markets.
Rates may drift higher in 2021 as both growth and inflation rise.
Citi Private Bank’s Global Investment Committee maintains a deep underweight on global fixed income, particularly European and Japanese sovereign bonds and short-duration U.S. Treasuries. Overweights include U.S. Treasury-Inflation-Protected and U.S. agency-backed securities. Neutral weightings include U.S. municipals, medium- and long-duration U.S. Treasuries, U.S. and Europe high yield, and Emerging Market debt.
Global Risks: Too Much Optimism
It is not our assumption, but there is a risk that vaccines could disappoint.
None of the scenarios outlined in this section are our base case views, but we feel obligated to provide a section on “what could go wrong.” In our view, vaccine disappointments provide the biggest risk to our outlook. Thus far, the positive developments on vaccines have been nothing short of extraordinary with vaccines being developed in record time. By comparison, researchers spent well over a decade developing the polio vaccine.
However, limited tests have been performed among younger cohorts, the duration of the vaccine is uncertain, the desire of the global population to take the vaccines may be sub-par (see figure 7), new virus strains may emerge, and distribution challenges may be notable with the rollout occurring unevenly between developed and emerging markets. This could lead to a longer return to normal than financial markets are currently anticipating.
|Oct 19-Nov 1
|No college degree||45||55||10|
We do find it encouraging that vaccine acceptance seems to climbing as positive vaccine news is announced. As figure 7 shows, approximately 58% of Americans have stated that they are willing to be vaccinated with an FDA-approved vaccine were it available right now at no cost. Though clear risks remain, we are hopeful that grandchildren and grandparents will be reunited in the year ahead and that international travel and commerce will be able to return at a rapid pace.
Fiscal stimulus from Congress could disappoint and the control of the Senate remains undecided.
A return to normalcy would likely materially bolster both consumer and small-business confidence, but there are still near-term risks with much of society still facing difficult challenges. Notably, small business uncertainty continues to climb (see figure 8). This is why additional fiscal aid from U.S. Congress has been a key focus of both Wall Street and policymakers.
Small business uncertainty remains high with additional support from Congress likely needed.
As it stands now, a deal in the range of $900 billion seems to have been struck with lawmakers set to vote on the bill imminently. The package includes one-time $600 stimulus checks per adult or child below certain income levels, a $300 enhancement to weekly unemployment insurance benefits for 11 weeks, $284 billion in loan funding for the Paycheck Protection Program, an extension to eviction moratoria, funding for schools and colleges to help comply with health protocols, funding for enhanced COVID-19 testing and vaccine distribution, and aid for airports and airlines. We expect a bill to eventually be passed, but the ability of Congress to work on a bi-partisan basis moving forward remains an area of uncertainty. Particularly with the control of the Senate still up for grabs with two Senate races in Georgia determining the fate. The outcome of these races may force financial markets to rapidly adjust policy expectations were Democrats to gain control of the Senate. The odds seem to favor a Republican-controlled Senate, but the January 5th elections will be a binary event that could result in a knee-jerk reaction in financial markets.
Currencies: The Falling Dollar
Expectations are for further U.S. dollar downside in 2021.
Large U.S. trade deficits and fiscal deficits and a zero-bound interest rate monetary policy suggest that the U.S. dollar could weaken further over time. Particularly if investor demand for safe-haven currencies falls as the global economy recovers post-COVID. Aside from boosting overseas returns for U.S.- based investors, this could also have a material impact on strength of weakness of other currencies as well. Below are the regional views from Citi Private Bank:
We see additional local support drivers for both the euro and British pound.
EUROPE: Following this summer’s weakness in the trade-weighted U.S. dollar, we look for further dollar downside in 2021 based on U.S.-related factors. However, we see additional local support drivers for both the euro and British pound. The Eurozone no longer faces potential breakup risk, which removes a significant overhang from the euro. The EU Recovery Fund is likely to provide economic support to the weaker peripheral countries, while the ECB bond buying program now includes more peripheral bonds, including those of Greece. The lessened Eurozone risks are best reflected in the spread of the Italian 10-year sovereign bond yield over that of 10-year German Bunds. This has fallen from 160 basis points at the start of the year to 121 basis points as of 13 November.
Sterling is cheap in real-exchange rate terms. The main catalyst for improved performance could be a possible “bare-bones” trade deal with the EU. There are signs of pent-up demand for UK assets, including equities and property, which should slowly increase inflows and sterling buying.
The Mexican peso, Colombian peso and Brazilian real are candidates for appreciation.
LATIN AMERICA: Amid the pandemic, Latin American free-floating exchange rates suffered sharp depreciations. The Brazilian real, for example, was 50% down at its low point. However, unlike during every previous externally triggered shock in the region, inflation expectations have remained well contained.
Given improved external competitiveness, equivalent to implicit higher risk premia, some currencies have room to recover further in nominal terms. While we are unlikely to see large foreign investor inflows into local bonds given the low level of interest rates, some building of equity exposure may occur in the coming months, thus supporting currencies.
The overall levels of real exchange rates do not seem consistent with the lack of external imbalances typically associated with such sharp depreciations and hence we expect currencies to stabilize and some even appreciate from current levels. Amid global economic recovery in 2021, the Brazilian real and the Colombian peso are the likeliest to see nominal appreciation. The Mexican peso could see further appreciation. However, medium term uncertainty investors could consider unwinding exposure below 20 to the U.S. dollar. Similarly, the Chilean Peso near 750 might not be fully pricing in the risks embedded in the redrafting of the constitution nor general elections in 2021.
The Japanese yen and Chinese yuan are our favored regional currencies.
ASIA: Asian currencies – as represented by the Bloomberg JP Morgan Asia Dollar Index – have risen by 8% since their March lows. That is the highest since late 2017, although still 2% below the 10-year average. The collapse of U.S. interest rates in the wake of the pandemic brought massive inflows and drove Asian currency strength, especially in the onshore Chinese yuan. The surge in U.S. government indebtedness and the resulting financial repression are likely to keep pressure on the U.S. dollar and thus support Asian currencies in the coming years. We favor the Chinese yuan and Japanese yen.
The outperformance of the Chinese yuan this year was attributable to a wider bond yield gap with the U.S., relative economic strength, and the inclusion of Chinese bonds in fixed income benchmarks. The gap between Chinese and U.S. 5-year government bond yields has widened from under 50bps to almost 300bps, consistent with a level of 6.3 in the dollar/yuan exchange rate. We see local currency bonds as an opportunity in 2021.
The Japanese yen also outperformed in 2020, appreciating 4% as of 31 October. The gap between U.S. and Japanese 10-year yields has collapsed to 50bps from as much as 300bps in 2018. Pressure for a stronger yen is substantial, with limited scope for additional easing from the Bank of Japan.
GREENING THE WORLD:
Some might see the topic of climate change as a political one, but there are dynamic market forces at play that are powering the transition from fossil fuels to renewables. Although we often focus on the negatives of 2020, clean energy actually became the cheapest new source of electricity in most of the world in 2020.Ways to Implement
- Electric carmakers, battery makers, infrastructure suppliers and installers, and smart appliance makers
- Other firm’s at the cutting edge of new energy development, electrification, or energy efficiency
- “Carbon transition aware” companies
- Water resources and infrastructure
THE AGE OF HYPER-CONNECTIVITY:
The full scale rollout of 5G will begin in force in 2021, these advances will lead to even higher number of devices being connected to the internet and a vast increase in the amount of data being produced. While Technology shares may be stretched right now, we still like near-term beneficiaries.Ways to Implement
- Near-term beneficiaries of the rollout of 5G
- Longer-term beneficiaries in areas such as autonomous driving, telemedicine, and smart cities
- Cybersecurity exposure
THE RISE OF ASIA IN A G-2 WORLD:
As the U.S. and China compete, there will be an increased demand on their supply chains benefitting from this new Technology Cold War. Within China, consumer brands, e-commerce, travel & leisure, healthcare insurance, and wealth management look like areas that will continue to see high demand in the coming decade.Ways to Implement
- Semiconductor equipment makers from Taiwan, Korea, Japan, and Europe
- Southeast Asia infrastructure expansion beneficiaries, including construction, automation, shipping commodities, and real estate
- Asian alternative energy and electric vehicles, firms with strong governance
The world’s elderly population is growing quite rapidly and this is increasing the demand for healthcare. Combined with the ongoing global pandemic, we like life science companies that provide tools for vaccine development and manufacture, as well as makers of vaccine packaging and transport. This may be one of the most significant logistical challenges of our lifetime, but it also provides a tremendous opportunity.Ways to Implement
- Developers of novel diagnostics and therapies
- Life science companies that enable vaccine developments and manufacture
- Telehealth and wearable technologies
- Innovators and solutions providers across medtech
Asset Class Views: Stocks and Fixed Income
|Asset Class: Equities||View||Investment Rationale|
|U.S. Large Cap||Neutral||Broad market valuations are no longer cheap – even when pricing in a recovery from the COVID-19 shock. However, this is largely a function of the powerful rally in Technology shares, with the NASDAQ 100 up as much as 35% in the year-to-date. We still find value in Cyclicals generally, such as Industrials, Financials, and Real Estate Investment Trusts (REITS).|
|European Large Cap||Overweight||COVID-19 infections have surged to the highest rates of the year in countries such as France and Spain. This will hold back the near-term pace of recovery. However, the European Union has unified around a stronger fiscal expansion and the region appears poised to benefit from a global trade recovery and cheaper valuations relative to U.S. large-cap shares.|
|Japan Large Cap||Overweight||Japanese large-cap stocks appear increasingly likely to benefit from a global trade recovery and subsequent upward earnings-per-share (EPS) revisions in the coming year. Even with a transition in leadership, the economy benefited from lower levels of virus spreading, less extreme shutdown measures, and ample stimulus. A lower correlation between shares and the yen makes Japan increasingly appealing as a global rebound opportunity.|
|Developed Market Small and Mid-Cap (SMID)||Overweight||Our thematic preference remains for secular growth shares in healthcare and the “digital economy” over the longer term. This favors U.S. large-cap equities. However, their strong outperformance YTD suggests more limited gains ahead. In the coming year, we would expect global SMID to catch up some in performance to U.S. large-cap shares.|
|Emerging Asia||Overweight||Chinese shares, particularly those in the technology and internet sector have risen sharply in recent months. Asian economies are positioned well for the trade and industrial rebound we expect through the first half 2021. Shares outside of China have lagged far behind and may catch up in 2021.|
|Emerging EMEA||Neutral||A brighter cyclical outlook for oil and a likely prolonged period of easing by the ECB and Fed encourages us in the emerging markets of Europe, the Middle East and Africa. Despite the now stronger conviction than previously, we still hold higher relative convictions in both Asia and LatAm regions.|
|Emerging Latin America||Overweight||Given the severe underperformance relative to other markets, we would expect the region to continue to perform well and play catch up. However, we maintain our cautious long-term outlook beyond the potential global equity rebound.|
|Asset Class: Fixed Income||View||Investment Rationale|
|U.S. Sovereign Bonds||Underweight||The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, while holding an overweight to U.S. Treasury-Inflation-Protected Securities (TIPS). Large scale fiscal packages have temporarily put a floor in long-dated yields, while the Fed has cut short-rates to zero, diminishing the appeal of cash. Fed asset purchases may limit how far long-dated yields can ultimately rise, though we expect some rebound in rates in a 2021 cyclical recovery. For taxable U.S. investors, muni yields are attractive relative to other taxable high quality bonds.|
|European Sovereign Bonds||Underweight||An average yield of 0% remains unappealing and we stay underweight. The periphery is likely to remain well supported from the European Union Recovery Fund, where valuations are relatively better.|
|Emerging Market (EM) Sovereign Bonds||Neutral||
External debt: U.S. dollar-denominated sovereign and corporate spreads have fully recovered, though valuations still look relatively attractive when compared to U.S. corporates.
Local bonds: Yields have fallen to their lowest levels on record. Future returns may be predicated on foreign exchange, where continued U.S. dollar weakness may help support performance.
|Corporate Investment Grade||Neutral||
U.S. IG: Favor BBBs within 5-7 years to maturity, however, interest rate risks are rising. Fed purchases are expected to keep spreads supported during bouts of risk aversion.
Euro IG: Spreads and yields have recovered, supported by improving risk appetite and ECB purchases. Selective opportunities in lower quality IG and some cyclical sectors.
|Corporate High Yield||Neutral||
U.S. HY: Expect spreads to be supported by Fed purchases, if needed. Fallen Angels offer an interesting opportunity, given its higher quality and longer duration.
Euro HY: Spreads still offer value amid the beginning stages of an economic recovery. EU policy and ECB purchases are likely to indirectly support prices.
Forecasts, Indicators, and Returns
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Global: Based on PPP Weights||-3.7||5.5||3.7||2.8||3.2||3.3||N/A||N/A||N/A||N/A||N/A||N/A|
|Equity Returns (%)||Valuations||Dvd Yield (%)|
|Equity Index||Level||2015||2016||2017||2018||2019||Month to Date||Quarter to Date||Year to Date||Price to Earnings||12-Month Forward P/E Ratio||Current (%)|
|Fixed Income Returns (%)||Other Key Rates|
|Fixed Income||Yield to Maturity||2015||2016||2017||2018||2019||Month to Date||Quarter to Date||Year to Date||Instrument||Current
|Global||0.57||0.9||3.3||2.1||0.5||7.1||0.6||0.6||5.5||10 Year U.S.||0.84|
|U.S.||1.06||0.5||2.7||3.6||0.0||8.9||1.1||0.6||7.6||Treasury 30 Year U.S.||1.57|
|Europe||-0.12||1.1||3.3||0.5||0.5||6.0||0.3||1.1||3.9||Treasury 1 Year CD Rate||0.41|
|EM Sovereign||4.36||0.6||9.6||9.8||-4.1||14.8||4.2||3.8||3.4||30 Year Fixed Mortgage||2.94|
|U.S. High Yield||5.40||-5.6||17.8||7.0||-2.1||14.1||3.9||4.4||4.2||Prime Rate||3.25|
- The Citi Emerging Market Sovereign Bond Index (ESBI)
- ESBI includes Brady bonds and U.S. dollar-denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Africa, Asia, Europe and Latin America. We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded.
- The Citi U.S. Broad Investment-Grade Bond Index (USBIG)
- USBIG tracks the performance of U.S. Dollar-denominated bonds issued in the US investment-grade bond market. Introduced in 1985, the index includes US Treasury, government sponsored, collateralized, and corporate debt providing a reliable representation of the U.S. investment-grade bond market. Sub-indices are available in any combination of asset class, maturity, and rating.
- The Citi World Broad Investment Grade Bond index
- The Citi World Broad Investment Grade Bond index is weighted by market capitalization and includes fixed rate Treasury, government sponsored, mortgage, asset backed, and investment grade (BBB–/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of $1 billion for Treasuries, $5 billion for mortgages, and $200 million for credit, asset-backed and government-sponsored issues.
- Corporate High Yield
- Corporate high yield is measured against the Citigroup U.S. High Yield Market Index, which includes all issues rated between CCC and BB+. The minimum issue size is $50 million. All issues are individually trader priced monthly.
- Corporate Investment Grade
- Corporate investment grade is measured against the Citi World Broad Investment Grade Index (WBIG) – Corporate, a subsector of the WBIG. This index includes fixed rate global investment grade corporate debt within the finance, industrial and utility sectors, denominated in the domestic currency. The index is rebalanced monthly.
- Developed Market Large Cap Equities
- Developed market large cap equities are measured against the MSCI World Large Cap Index. This is a free-float adjusted, market-capitalization weighted index designed to measure the equity market performance of the large cap stocks in 23 developed markets. Large cap is defined as stocks representing roughly 70% of each market’s capitalization.
- Developed Market Small- and Mid-Cap Equities
- Developed Market Small- and Mid-Cap Equities are measured against the MSCI World Small Cap Index, a capitalization-weighted index that measures small cap stock performance in 23 developed equity markets.
- Developed Sovereign
- Developed Sovereign is measured against the Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the market must satisfy size, credit and barriers-to-entry requirements. In order to ensure that the WGBI remains an investment grade benchmark, a minimum credit quality of BBB–/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly.
- Dow Jones Industrial Average (DJIA)
- DJIA is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
- Emerging Markets Equities
- Emerging Markets Equities are measured against the MSCI Emerging Markets Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure equity market performance of 22 emerging markets. Emerging EMEA stands for Europe, Middle East, and Africa.
- Emerging Sovereign
- Emerging Sovereign is measured against the Citi Emerging Market Sovereign Bond Index (ESBI). This index includes Brady bonds and U.S. dollar-denominated emerging market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in Africa, Asia, Europe and Latin America. We classify an emerging market as a sovereign with a maximum foreign debt rating of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded.
- The Euro Broad Investment-Grade Bond Index (EuroBIG)
- EuroBIG is a multi-asset benchmark for investment-grade, Euro-denominated fixed income bonds. Introduced in 1999, the EuroBIG includes government, government-sponsored, collateralized, and corporate debt.
- Europe Ex UK Equities
- Europe Ex UK Equities are measured against the MSCI Europe ex UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed to measure the performance of large cap stocks in each of Europe’s developed markets, excluding the United Kingdom.
- The EURO STOXX 50 Index
- The EURO STOXX 50 Index covers 50 blue-chip stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
- Fed Funds Rate
- Fed Funds Rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis. Reserves are excess balances held at the Federal Reserve to maintain reserve requirements. The fed funds rate is one of the most important interest rates in the U.S. economy since it affects monetary and financial conditions, which in turn have a bearing on critical aspects of the broad economy including employment, growth, and inflation. The Federal Open Market Committee (FOMC) that meets eight times a year, sets the fed funds rate, and uses open market operations to influence the supply of money to meet the target rate.
- Global Bonds
- Global Bonds are measured against the Citigroup Broad Investment Grade Bond. The index is weighted by market capitalization and includes fixed rate Treasury, government sponsored, mortgage, asset backed, and investment grade (BBB–/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of $1 billion for Treasuries, $5 billion for mortgages, and $200 million for credit, asset-backed and government-sponsored issues.
- Global Equities
- Global Equities are measured against the MSCI All Country World Index, which represents 48 developed and emerging equity markets. Index components are weighted by market capitalization.
- Gross Domestic Product
- Gross Domestic Product is the total value of goods produced and services provided in a country during one year.
- The High-Yield Market Index
- The High-Yield Market Index is a U.S. Dollar-denominated index which measures the performance of high-yield debt issued by corporations domiciled in the U.S. or Canada. Recognized as a broad measure of the North American high-yield market, the index includes cash-pay, deferred-interest securities, and debt issued under Rule 144A in unregistered form. Sub-indices are available in any combination of industry sector, maturity, and rating.
- Leading Economic Indicators
- Leading Economic Indicators are measurable economic factors that change before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but they are not always accurate.
- MSCI All Country World Index
- MSCI All Country World Index captures all sources of equity returns in 23 developed and 23 emerging markets.
- MSCI Emerging Markets Index
- MSCI Emerging Markets Index reflects performance of large and mid-cap stocks in roughly 20 emerging markets.
- MSCI Japan Large Cap Index
- MSCI Japan Large Cap Index is a free-float-adjusted market-capitalization-weighted index designed to measure large-cap stock performance in Japan.
- The NASDAQ
- The NASDAQ composite index is a market-capitalization weighted index of more than 3,000 common equities listed on the Nasdaq stock exchange.
- The Nikkei 225
- The Nikkei 225 is Japan’s leading index. It is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo stock exchange.
- Price-to-Earnings Ratio (P/E ratio)
- Price-to-Earnings Ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple. The P/E ratio can be calculated as: Market Value per Share / Earnings per Share.
- S&P 500 Index
- S&P 500 Index is a capitalization-weighted index, which includes a representative sample of 500 leading companies in leading industries of the US economy. Although the S&P 500 focuses on the large cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market.
- The Unemployment Rate
- The Unemployment Rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate.