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Monthly Market Snapshot: February 28, 2022
Highlights
Global equity markets remained volatile in February as the ongoing conflict between Russia and Ukraine and the prospect of tighter central bank monetary policy dragged indices lower. The MSCI AC World Index is now off 7.5% year-to-date. In the United States, the S&P 500, Dow Jones, and NASDAQ were each down over 3.0% in the month. European stocks underperformed with the EURO STOXX 50 down 5.8% as investors considered Europe’s dependence on Russian energy. Emerging market stocks slipped 3.1%. The 10-year U.S. Treasury yield rose 5 basis points to 1.83%.
The conflict between Russia and Ukraine has gripped markets as it continues to escalate – both militarily and in terms of sanctions. Thus far, Russia’s energy sector has largely avoided targeted sanctions from Europe as the region seeks to limit the collateral damage of surging energy costs. However, a shift in energy supply chains seems assured as nations seek to limit dependence on Russian energy. The conflict’s impact on inflation will be a key consideration for global central banks.
In early March, Citi’s Global Investment Committee decided to add a 4% portfolio weighting to global natural resources as a defensive hedge. We also reinstated a 2.0% overweight to gold. These additions are being largely funded by a reduction in the allocation to both European and Japanese stocks.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Expanding)
Strong demand continues to be met with supply-side constraints with inflation staying elevated. Growth may be temporarily impacted by the Omicron variant in the first quarter of 2022. Inflation may remain elevated in the first half of 2022 with the Russia Ukraine conflict disrupting commodity markets. In response to inflation, we expect the Fed to raise interest rates by 25 basis points at its March 16 meeting.
Stocks (Slightly Overweight Large-Cap; Underweight SMID)
Citi’s Global Investment Committee (GIC) decided to de-risk by further reducing its overweight to U.S. large-cap stocks. We still believe that corporate profits will be solid this year, but tighter monetary policy through both rate hikes and balance sheet reduction is making us more cautious. The Committee also deepened its underweight in small- and middle-cap (SMID) stocks as the space often includes companies with weaker near-term earnings potential. We continue to prefer higher quality stocks like dividend growers, healthcare, and consumer staples.
Bonds (Overweight)
The GIC is underweight short-term U.S. Treasuries, overweight intermediate-duration U.S. Treasuries, and neutral on long-dated Treasuries. We also remain overweight U.S. Treasury-Inflation-Protected Securities (TIPS). The Committee did decide to add further to its overweight to intermediate-duration Treasuries and Investment Grade Corporate debt as an additional risk hedge.
Europe and Japan
Economy (Europe: Expanding / Japan: Expanding)
The headwinds to growth are rising in Europe with inflation likely to remain above 5% until summer and the conflict between Russia and Ukraine causing a great deal of uncertainty across the region. Citi Research’s economists expect growth to fall from a rate of 5.2% year-on-year in 2021 to a rate of 3.3% year-on-year in 2022. Unlike most developed economies, Japan’s economy is expected to grow faster in 2022 (2.5%) than in 2021 (1.6%). However, growth forecasts have been revised down some as the country increased COVID restrictions in response to the Omicron variant.
Stocks (Neutral UK; Underweight Europe ex UK; Underweight SMID / Underweight Japan)
The GIC moved from an overweight on Europe ex UK and Switzerland large-cap equities to an underweight position. The Committee also reduced its allocation to UK equities – bringing the weighting down from an overweight to neutral. We also deepened our underweight position on non-U.S. small- and mid-cap stocks (SMID). Europe’s dependence on Russian energy supplies increases the odds of supply chain disruptions and rising energy costs. We also downgraded Japanese stocks to underweight.
Bonds (Underweight)
The GIC maintains a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Expanding)
Citi Research’s economists expect emerging market economies to slow from 6.7% year-on-year in 2021 to 4.5% year-on-year in 2022, but the outlook remains highly uncertain with the impact of sanctions against Russia an unresolved question. The success of China’s stimulus efforts will also play a role.
Stocks (Overweight China; Neutral Asia ex China and Latin America; Underweight EMEA)
The GIC remains overweight China but has downgraded its view of Emerging Market Asia ex China from overweight to neutral. China is macroeconomic policies are easing and the region is somewhat insulated from rising geopolitical tensions. This could serve as a tailwind for the region’s equity markets. We are neutral on Latin America and underweight Emerging Europe, Middle East, and Africa (EMEA).
Bonds (Overweight Asia; Neutral EMEA and Latin America)
The GIC maintains an overweight on emerging market fixed income, specifically Asia. In local bonds, future returns may be driven by foreign exchange movements.
U.S. Stock Market and Economic Forecasts
| Indicator | 2020A | 2021F | 2022F |
|---|---|---|---|
| S&P 500 Estimate | 3,756 | 4,766A | 4,700 |
| S&P 500 P/E Ratio | 27.43x | 20.96x | 19.0x |
| S&P 500 EPS Growth | -13.5% | 43.1% | 8.0% |
| GDP (YoY) | -3.4% | 5.7%A | 3.6% |
| Inflation (YoY) | 1.2% | 3.9%A | 4.9% |
| Unemployment Rate | 8.1% | 5.4%A | 3.7% |
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021F | 2022F | 2023F | 2021F | 2022F | 2023F | 2021F | 2022F | 2023F | 2021F | 2022F | 2023F | |
| Global | 5.8 | 3.9 | 3.2 | 3.3 | 4.8 | 3.0 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 6.1 | 4.2 | 3.6 | 4.3 | 5.3 | 3.8 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 5.0 | 3.5 | 2.3 | 2.9 | 4.4 | 2.1 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 5.7 | 3.6 | 2.2 | 3.9 | 4.9 | 2.5 | 1.51 | 2.00 | 2.00 | N/A | N/A | N/A |
| Japan | 1.6 | 2.5 | 2.0 | -0.2 | 1.3 | 0.9 | 0.09 | 0.20 | 0.34 | 110 | 117 | 114 |
| Euro Area | 5.1 | 3.3 | 2.8 | 2.6 | 4.6 | 1.8 | -0.30 | 0.25 | 0.38 | 1.18 | 1.16 | 1.14 |
| Emerging Markets | 6.7 | 4.5 | 4.2 | 4.0 | 5.3 | 4.0 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 8.1 | 4.7 | 4.8 | 0.9 | 2.0 | 2.4 | 2.99 | 2.86 | 3.00 | 6.45 | 6.43 | 5.95 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2017 | 2018 | 2019 | 2020 | 2021 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 698 | 21.6 | -11.2 | 24.0 | 14.3 | 16.8 | -2.7 | -7.5 | -7.5 | 18.6 | 16.7 | 1.9 |
| S&P 500 | 4374 | 19.4 | -6.2 | 28.9 | 16.3 | 26.9 | -3.1 | -8.2 | -8.2 | 22.4 | 19.6 | 1.4 |
| DJIA | 33893 | 25.1 | -5.6 | 22.3 | 7.2 | 18.7 | -3.5 | -6.7 | -6.7 | 17.9 | 17.8 | 1.9 |
| NASDAQ | 13751 | 28.2 | -3.9 | 35.2 | 43.6 | 21.4 | -3.4 | -12.1 | -12.1 | 99.7 | 27.6 | 0.7 |
| Europe | 3292 | 21.2 | -18.5 | 22.5 | 3.4 | 12.5 | -5.8 | -9.8 | -9.8 | 14.5 | 12.8 | 2.6 |
| Japan | 3614 | 21.8 | -14.5 | 17.1 | 12.2 | -0.1 | -1.2 | -6.2 | -6.2 | 13.4 | 13.4 | 2.3 |
| Emerging Markets | 1171 | 34.3 | -16.6 | 15.4 | 15.8 | -4.6 | -3.1 | -4.9 | -4.9 | 12.9 | 12.0 | 2.6 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2017 | 2018 | 2019 | 2020 | 2021 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.73 | 2.1 | 0.5 | 7.1 | 5.7 | -2.1 | -1.5 | -3.2 | -3.2 | 10-Yr. U.S. Treasury | 1.83 |
| U.S. | 2.49 | 3.6 | 0.0 | 8.9 | 7.7 | -1.6 | -1.3 | -3.4 | -3.4 | 30-Yr. U.S. Treasury | 2.16 |
| Europe | 0.73 | 0.5 | 0.5 | 6.0 | 4.1 | -2.9 | -2.2 | -3.3 | -3.3 | 1-Yr. CD Rate | 0.28 |
| EM Sovereign | 6.40 | 9.8 | -4.1 | 14.8 | 5.4 | -2.8 | -6.6 | -9.4 | -9.4 | 30-Yr. Fixed Mortgage | 4.30 |
| U.S. High Yield | 5.89 | 7.0 | -2.1 | 14.1 | 6.3 | 5.4 | -1.0 | -3.6 | -3.6 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
Note 1: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.
Note 1: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.