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Monthly Market Snapshot: December 2020
Highlights
It’s over! It’s finally over! 2020 has officially come to an end and it is time to take stock of the annual performance of financial markets. The MSCI All Country World Index, a broad measure of stocks globally, rose by 14.3% in 2020. A solid performance during a year that global growth likely fell by 4.0% year-on-year. In the United States, the S&P 500 climbed 16.3% while the Dow Jones gained 7.2%. The tech-heavy NASDAQ surged 43.6% as social distancing increased demand for commutation and entertainment services. European shares lagged behind with just a 3.4% gain. Emerging markets rose 15.8%, but the gains were largely concentrated in Asia. Over the year, the 10-year U.S. Treasury yield slid from 1.92% to just 0.91%.
Vaccine developments bolstered confidence that there is a light at the end of the tunnel. Barring an unexpected setback, a broad distribution of vaccines in 2021 should help the global economy to more fully recover. Additional fiscal policy from developed markets governments still seems likely.
Citi Private Bank’s Global Investment Committee maintains an overweight on global equities and an underweight on global fixed income.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Recovering)
The U.S. economy continues to recover with real GDP in the fourth quarter currently tracking at around 8.9% annualized according to the Atlanta Fed. Growth seems likely to moderate heading into in the first quarter of 2021 as COVID-19 restrictions weigh on growth, but vaccines should lead to above trend growth in 2021 with annual GDP clocking in between 4% to 5.0%. The $900 billion COVID-relief bill recently passed by Congress provides $286 billion in support to consumer spending in the first quarter.
Stocks (Neutral; Overweight SMID)
Citi Private Bank’s Global Investment Committee is neutral on U.S. large-cap stocks, but remains overweight U.S. small- and mid-cap shares (SMID). Significant stimulus from the Fed and U.S. congress boosted markets after a significant drop in March, but valuations are no longer cheap. We remain focused on areas of the market that still offer some value – particularly Cyclicals sectors like Industrials, Financials, Small-caps, and Real Estate Investment Trusts Securities (REITS) – which should benefit from the recovery economy.
Bonds (Underweight)
The GIC is underweight short-duration and neutral on intermediate- and long-duration U.S. Treasuries. The Committee is overweight Treasury-Inflation Protected Securities (TIPS) and U.S. residential- and commercial-mortgage REITS. Overall, we expect some rebound in rates on a 2021 cyclical recovery and higher U.S. debt burdens. For taxable U.S. investors, muni yields are relatively attractive.
Europe and Japan
Economy (Europe: Recovering / Japan: Recovering)
In Europe, a negative real GDP print in the fourth quarter is possible, but vaccines should lead to a material increase in the pace of economic activity in the second half of 2021. This should allow the European Union’s economy to grow by about 3.5% to 4.0% next year. In Japan, Citi’s economists expect continued economic expansion in 2021 after a temporary pause in the first quarter following a recent COVID-19 surge. For the full year, an annual growth rate of 2.0% seems feasible.
Stocks (Europe: Overweight; Overweight SMID / Japan: Overweight; Overweight SMID)
The GIC has moved to an overweight on both Europe and Japan large-caps, as well as small- and mid-cap stocks (SMID). Virus containment remains a challenge in Europe, but the European Union should benefit from a recovery in global trade with the International Monetary fund predicting world trade volumes will rise by 8% year-on-year in 2021. Cheaper valuations relative to U.S. large cap shares are also appealing. Japanese large cap stocks also appear poised to benefit from trade.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Recovering)
Citi’s economists expect emerging market economies to rebound from -2.0% to 6.2% in 2021. Although vaccine rollouts may take longer in EM and stretch into 2022. In China, growth looks set to rise from 2.1% in 2020 to 8.2% in 2021 as household consumption drives growth.
Stocks (Overweight)
The GIC is overweight emerging markets (Asia and Latin America). Emerging market stocks performed well in 2020, but the gains were concentrated in Asia. Other regions like Latin America may play catch up in the year ahead. However, the GIC remains cautious on the Latin America region over the longer-term.
Bonds (Neutral)
We are neutral emerging market fixed income as U.S. dollar-denominated sovereign and corporate spreads have fully recovered, though valuations still look relatively attractive when compared to U.S. corporates. In local bonds, future returns may be predicated on foreign exchange movements.
U.S. Stock Market and Economic Forecasts
| Indicator | 2019A | 2020F | 2021F |
|---|---|---|---|
| S&P 500 Target | 3,231 | 3,300 | 3,800 |
| S&P 500 P/E Ratio | 18.97x | 27.24x | 22.35x |
| S&P 500 EPS Growth | 2.0% | -16.8% | 21.9% |
| GDP (YoY) | 2.2% | -3.4% | 5.1% |
| Inflation (YoY) | 1.5% | 1.2% | 1.9% |
| Unemployment Rate | 3.7% | 8.1% | 5.9% |
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | |
| Global | -3.9 | 5.0 | 3.6 | 2.0 | 2.2 | 2.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| 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 |
| Industrial Countries | -5.3 | 4.1 | 2.8 | 0.7 | 1.3 | 1.7 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | -3.4 | 5.1 | 1.6 | 1.2 | 1.9 | 2.0 | 1.25 | 1.25 | 1.25 | N/A | N/A | N/A |
| Japan | -5.1 | 2.0 | 2.3 | 0.1 | -0.3 | 0.6 | 0.03 | 0.05 | 0.05 | 107 | 107 | 107 |
| Euro Area | -7.3 | 3.6 | 4.3 | 0.2 | 0.7 | 1.3 | -0.50 | -0.40 | -0.17 | 1.15 | 1.22 | 1.25 |
| Emerging Markets | -2.0 | 6.2 | 4.5 | 3.7 | 3.3 | 3.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 2.1 | 8.2 | 5.5 | 2.6 | 1.2 | 2.2 | 3.00 | 3.21 | 3.23 | 6.86 | 6.30 | 6.05 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 646 | -4.3 | 5.6 | 21.6 | -11.2 | 24.0 | 4.5 | 14.4 | 14.3 | 31.8 | 20.3 | 1.8 |
| S&P 500 | 3756 | -0.7 | 9.5 | 19.4 | -6.2 | 28.9 | 3.7 | 11.7 | 16.3 | 29.7 | 22.8 | 1.6 |
| DJIA | 30606 | -2.2 | 13.4 | 25.1 | -5.6 | 22.3 | 3.3 | 10.2 | 7.2 | 25.3 | 20.8 | 2.0 |
| NASDAQ | 12888 | 5.7 | 7.5 | 28.2 | -3.9 | 35.2 | 5.7 | 15.4 | 43.6 | 66.2 | 33.4 | 0.8 |
| Europe | 3246 | 3.9 | 0.7 | 21.2 | -18.5 | 22.5 | 4.0 | 16.1 | 3.4 | 52.5 | 18.1 | 2.2 |
| Japan | 3855 | 9.1 | 0.4 | 21.8 | -14.5 | 17.1 | 4.0 | 15.1 | 12.2 | 30.5 | 21.8 | 2.0 |
| Emerging Markets | 1291 | -17.0 | 8.6 | 34.3 | -16.6 | 15.4 | 7.2 | 19.3 | 15.8 | 25.7 | 15.7 | 1.8 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 0.53 | 0.9 | 3.3 | 2.1 | 0.5 | 7.1 | 0.2 | 0.8 | 5.7 | 10-Yr. U.S. Treasury | 0.91 |
| U.S. | 1.01 | 0.5 | 2.7 | 3.6 | 0.0 | 8.9 | 0.2 | 0.8 | 7.7 | 30-Yr. U.S. Treasury | 1.64 |
| Europe | -0.13 | 1.1 | 3.3 | 0.5 | 0.5 | 6.0 | 0.1 | 1.3 | 4.1 | 1-Yr. CD Rate | 0.39 |
| EM Sovereign | 4.16 | 0.6 | 9.6 | 9.8 | -4.1 | 14.8 | 1.9 | 5.8 | 5.4 | 30-Yr. Fixed Mortgage | 2.87 |
| U.S. High Yield | 5.05 | -5.6 | 17.8 | 7.0 | -2.1 | 14.1 | 2.0 | 6.4 | 6.3 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
