2020 is Finally Over

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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.

Shawn Snyder Head of Investment Strategy,
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

Figure 1: 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%

This table shows Citi's U.S. stock market and economic forecasts. Indicators include year-end targets for the S&P 500, Price-to-Earnings ratios, Earnings-Per-Share growth rates, gross domestic product, inflation, and the unemployment rate.

Sources: Citi Research and Citi Personal Wealth Management as of December 31, 2020. Note 1: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. Note 2: “A” means actual; “F” means forecast. There can be no assurance that these projections will be met. Actual results may differ materially from the forecasts/estimates. The above table reflects the views of Citi Investment Research and Analysis (CIRA). CIRA forecasts take into consideration underlying economic, demographic, political, and psychological forces that drive market behavior. CIRA looks for trends and markets that offer potential as long-term investment ideas. You should carefully consider investment objectives, risks, charges, and expenses before investing.

Global Economic Forecasts

Figure 2: 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

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This table shows Citi's forecasts for gross domestic product, consumer prices, 10-year sovereign bond yields, and exchange rates versus the U.S. dollar across various regions.

Market Indicators

Figure 3: Equity Markets

Equities	Level	2015	2016	2017	2018	2019	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
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

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This table shows returns for various equity markets, including returns from the previous 5 years and current year period-to-date returns. It also shows current valuations for these markets.

Note: Global = MSCI All Country World Index (USD); Europe = Euro Stoxx 50 Price Index (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). Most equity index returns shown here are based on a U.S. dollar basis. International returns for a U.S.-based investor can differ significantly depending on the effects of foreign currency exchange.

Figure 4: Fixed Income Markets

Fixed Income	YTM	2015	2016	2017	2018	2019	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
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

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This table shows returns for various fixed income markets. It also includes other key rates like the 10-year U.S. Treasury, 30-year U.S. Treasury, 1-year CD rate, and 30-year fixed mortgage rate.

Note: Global = Citi World BIG Index (LCL); U.S. = Citi U.S. Broad Investment Grade Bond Index (USD); Europe = Citi Euro Broad Investment Grade Index (EUR); EM Sovereign = Citi Emerging Markets Government Bond Index (USD); and U.S. High Yield = Citi High-Yield Market Index (USD).

Asset Class Returns (Sorted by Performance)

Figure 5: ... — Figure 5: Global Asset Class Returns (Year-to-Date)

Figure 6: ... — Figure 6: S&P 500 Sector Total Returns (Year-to-Date)

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Highlights

Regional Outlook

U.S. Stock Market and Economic Forecasts

Global Economic Forecasts

Market Indicators

Asset Class Returns (Sorted by Performance)

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