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Monthly Market Snapshot: March 2020
Highlights
Stock benchmarks experienced their worst month (and quarter) since the Global Financial Crisis as the spread of COVID-19 forced investors to rush to safe-haven assets as economic activity shut down across many regions. In the United States, the S&P 500 plunged 12.5% in March while the Dow Jones tumbled 13.7%. The 10-year U.S. Treasury yield plummeted from 1.15% at the end of February to 0.67% at the end of March.
The coronavirus continues to cloud the economic outlook. A deep economic contraction is widely expected. Investors are less certain about the trajectory of the recovery. If containment measures and warm weather are successful in combating the virus, then a V-shaped recovery may be possible. However, if the duration of the pandemic is extended, then the recovery may take longer than markets are pricing in. Small business solvency remains a key question.
On February 24th, Citi Private Bank’s Global Investment Committee (GIC) decided to reduce its exposure to global equities. Those reductions were offset by adding to the GIC’s overweight position in U.S. Treasuries and gold. Citi’s year-end target for the S&P 500 is 2,700 and presents upside from today’s levels.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Slowing)
The U.S. economy will likely contract in the first and second quarters of 2020 as social distancing measures take their toll. Second quarter data will likely reflect the worst of the virus’ impact with Citi’s economists expecting a sharp -27.7% annualized decline in growth during the quarter. Assuming some return to normalcy, the economy should rebound in the second half of the year. However, the duration of the virus and solvency of small businesses will be key in determining the trajectory of the recovery. The unemployment rate could easily climb above 10.0% before starting to decline when businesses reopen.
Stocks (Neutral)
Citi Private Bank’s Global Investment Committee maintains a neutral position on U.S. stocks. After a sharp acceleration downward, equities look more attractive, but we think it’s too early to call a market bottom. A sustained decline in the rate of infections in the U.S. is a key metric we will be watching. Until we get more clarity on the duration of the virus, we think caution is still warranted.
Bonds (Overweight)
The Federal Reserve cut the fed funds rate to a range of 0.0% to 0.25% and embarked on limitless quantitative easing to provide market liquidity. While investment-grade and municipal debt suffered losses as investors moved to raise cash, moves from the Federal Reserve have added to stability of late. We still expect U.S. Treasuries to act as a portfolio buffer if stocks see another leg down. As such, the GIC is maintaining its overweight in short-, intermediate-, and long-duration U.S. Treasuries.
Europe and Japan
Economy (Europe: Slowing / Japan: Slowing)
Citi’s economists expect a deep recession to occur in the Euro Area with four quarters of year-on-year contraction. For the entirety of 2020, growth may contract by -8.4%. In Japan, a full year of recession also seems possible, but with growth improving to -1.9% on a year-on-year basis in the fourth quarter. The virus is likely to weigh more on services-based economies than manufacturing-driven economies.
Stocks (Europe: Neutral / Japan: Neutral)
The GIC is maintaining a neutral position on both European (ex-UK) and Japanese stocks. European equities are stabilizing after tentative signs the spread of the virus is slowing in hard-hit Italy, but the health of the banking system remains a lingering risk. In Japan, a state of emergency could be declared in Tokyo, presenting the possibility of downward pressure on the economy and markets.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Slowing)
Emerging market forecasts have been downgraded, but still show positive growth with projections averaging just above 1.0% year-on-year. Purchasing managers index readings in China are already showing some bounce back in regional economic activity. South Korea and Taiwan are projected to avoid recession this year.
Stocks (Neutral)
The GIC maintains a neutral weighting on emerging markets. As China reopens its economy, equities in Asia could prove more resilient as more advanced economies are just embarking on containment measures. However, new lockdown measures in India, Malaysia and Australia pose some risk. The GIC remains long term optimistic on Asian consumption, technology and healthcare themes.
Bonds (Overweight)
We are overweight emerging market fixed income as U.S. dollar-denominated debt still offers some of the best relative value in global fixed income. We stress the importance of global diversification when investing in emerging markets.
U.S. Stock Market and Economic Forecasts
| Indicator | 2018A | 2019A | 2020F |
|---|---|---|---|
| S&P 500 Target | 2,507 | 3,050 | 2,700 |
| S&P 500 P/E Ratio | 15.43x | 18.97x | 21.04x |
| S&P 500 EPS Growth | 22.5% | 2.0% | -24.0% |
| GDP | 2.9% | 2.3% | -2.6% |
| Inflation | 2.0% | 1.4% | 0.7% |
| Unemployment Rate | 3.9% | 3.7% | 4.9% |
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019F | 2020F | 2021F | 2019F | 2020F | 2021F | 2019F | 2020F | 2021F | 2019F | 2020F | 2021F | |
| Global | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 3.0 | -0.6 | 4.2 | 3.2 | 2.9 | 3.1 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 1.7 | 1.4 | 1.6 | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 2.3 | -2.6 | 2.1 | 1.4 | 0.7 | 2.1 | 1.92 | 1.25 | 1.25 | N/A | N/A | N/A |
| Euro Area | 1.2 | -8.4 | 4.9 | 1.2 | 0.6 | 1.5 | -0.30 | -0.49 | -0.19 | 1.12 | 1.15 | 1.18 |
| Japan | 0.7 | -1.9 | 1.5 | 0.5 | 0.5 | 0.4 | -0.10 | -0.03 | 0.11 | 109 | 101 | 96 |
| Emerging Markets | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 6.1 | 2.4 | 6.9 | 2.9 | 3.6 | 1.9 | 2.99 | 2.64 | 2.90 | 6.91 | 6.89 | 6.67 |
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 | 442 | -4.3 | 5.6 | 21.6 | -11.2 | 24.0 | -13.7 | -21.7 | -21.7 | 15.0 | 14.2 | 3.1 |
| S&P 500 | 2585 | -0.7 | 9.5 | 19.4 | -6.2 | 28.9 | -12.5 | -20.0 | -20.0 | 16.4 | 16.1 | 2.4 |
| DJIA | 21917 | -2.2 | 13.4 | 25.1 | -5.6 | 22.3 | -13.7 | -23.2 | -23.2 | 14.9 | 15.4 | 3.0 |
| NASDAQ | 7700 | 5.7 | 7.5 | 28.2 | -3.9 | 35.2 | -10.1 | -14.2 | -14.2 | 46.5 | 22.4 | 1.3 |
| Europe | 2284 | 3.9 | 0.7 | 21.2 | -18.5 | 22.5 | -16.4 | -27.3 | -27.3 | 14.3 | 12.3 | 4.6 |
| Japan | 2830 | 9.1 | 0.4 | 21.8 | -14.5 | 17.1 | -8.1 | -17.7 | -17.7 | 12.8 | 11.4 | 2.8 |
| Emerging Markets | 849 | -17.0 | 8.6 | 34.4 | -16.6 | 15.4 | -15.6 | -23.9 | -23.9 | 11.8 | 11.4 | 3.3 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.12 | 0.9 | 3.3 | 2.1 | 0.5 | 7.1 | -1.4 | 1.6 | 1.6 | 10-Yr. U.S. Treasury | 0.67 |
| U.S. | 1.65 | 0.5 | 2.7 | 3.6 | 0.0 | 8.9 | -0.5 | 3.2 | 3.2 | 30-Yr. U.S. Treasury | 1.32 |
| Europe | 0.51 | 1.1 | 3.3 | 0.5 | 0.5 | 6.0 | -3.5 | -1.2 | -1.2 | 1-Yr. CD Rate | 0.68 |
| EM Sovereign | 7.49 | 0.6 | 9.6 | 9.8 | -4.1 | 14.8 | -13.5 | -13.0 | -13.0 | 30-Yr. Fixed Mortgage | 3.86 |
| U.S. High Yield | 9.99 | -5.6 | 17.8 | 7.0 | -2.1 | 14.1 | -11.6 | -13.1 | -13.1 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
