A Forced March Lower

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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.

Shawn Snyder Head of Investment Strategy,
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

Figure 1: 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%

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 March 27, 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
	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

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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	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

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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	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

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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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