A Giant June

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Monthly Market Snapshot: June 2019

Highlights

After a brief meltdown in May, global stocks regained their footing as U.S. – China trade tensions thawed and the Federal Reserve signaled easier monetary policy. Globally, stocks pushed 6.4% higher with European shares leading the way with a 8.2% gain. In the United States, stocks experienced similarly-sized gains with the S&P 500 adding 6.9% in the month. The areas most exposed to trade like the tech-heavy NASDAQ and emerging markets also saw relief – rising 7.4% and 5.7%, respectively.

Trade tensions remain unresolved, but having both sides back at the negotiating table is an improvement. Uncertainty on the final outcome remains high, but most investors appear optimistic that a deal will eventually be struck. With trade issues sidelined for now, the market’s focus will be on the Federal Reserve. It is widely expected that the Fed will cut rates at its July 31 meeting, but it is not yet a guarantee. Incoming economic data will be a driving factor.

Citi’s Private Bank’s Global Investment Committee (GIC) maintains a slight underweight on global stocks. After the decision, The GIC’s global stock allocation is 2.0% underweight, global fixed income is 1.5% overweight and cash is 0.5% overweight.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Slowing)

With about two-thirds of the required economic data having been reported, our tracking models point to about 2.3% real GDP growth in the second quarter. While slower than the 3.1% pace logged in the first quarter, the underlying drivers of growth (like consumer spending) should show improvement. For the full year, Citi’s economists expect the U.S. economy to grow by about 2.6% year-on-year in 2019 (versus 2.9% in 2018). Heading into 2020, growth could ease further as fiscal stimulus fades.

Stocks (Underweight)

Citi Private Bank’s Global Investment Committee remains underweight U.S. large-cap stocks. Trade tensions have eased between the U.S. and China, but much of this was likely priced in during the impressive June rally. Moving forward, our focus will be on incoming economic data and second quarter earnings season. We think that cyclical sluggishness may weigh on earnings in the second half. If accurate, this could pull the market back towards Citi’s year-end S&P 500 target of 2,850.

Bonds (Overweight)

The Federal Reserve appears to be moving towards a rate cut. Most investors are expecting the Fed to cut rates by at least 25 basis points at their July 31st meeting. If the Fed does cut, it will likely be in response to a deterioration in economic data, which would seemingly favor fixed income. The GIC remains overweight cash, short-, intermediate-, and long-duration U.S. Treasuries.

Europe and Japan

Economy (Slowing)

Lower oil prices and softness in economic activity during the second quarter led Citi’s economists to slightly lower their 2019 forecast from 1.2% to 1.1%. However, fresh monetary stimulus from the European Central Bank could lead to a modest improvement in 2020. In Japan, growth estimates have been brought down slightly – lowered 0.1% to 0.6% for 2019. The outlook for 2020 remains uncertain as Prime Minister Abe’s decision on whether or not to postpone a tax hike in October is dependent on U.S. – China trade developments. Currently, Citi is looking for just 0.1% growth in 2020.

Stocks (Europe: Neutral / Japan: Slight Underweight)

The GIC maintains a neutral stance on European (ex-UK) stocks. Even though valuations look reasonable, European exporters may be exposed to the ongoing trade tensions and Brexit remains a viable risk in the second half of this year. In Japan, there may be opportunities in certain sectors like robotics and automation, but selectivity is key.

Bonds (Underweight)

We still see the yields on most European and Japanese sovereign bonds as unacceptable. There appears to be better opportunities elsewhere.

Emerging Markets

Economy (Slowing)

Emerging market economies are expected to slow from 4.5% in 2018 to 4.3% in 2019. Economic data in China remained weak in May; however, there may be more calls for policy support which should help to stabilize growth. Avoiding the next U.S. round of tariffs should also help. Elsewhere in the region, Vietnam, Korea and Taiwan may benefit from a shift in supply chains. In Latin America, a string of negative economic data have caused growth estimates to be lowered slightly.

Stocks (Slight Overweight)

The GIC is overweight emerging market equities. Easing trade tensions and loose monetary policy in the U.S. should help to boost shares. Also, long-term growth prospects and valuations appear much better than in developed markets. We believe investors should focus on long-term trends.

Bonds (Slightly Overweight)

We are overweight emerging market fixed income – specifically in emerging Asia and Latin America.

U.S. Stock Market and Economic Forecasts

Figure 1: U.S. Stock Market and Economic Forecasts

Indicator	2018A	2019F	2020F
S&P 500 Target	2,507	2,850	Mid-Year: 3,000
S&P 500 P/E Ratio	15.43x	17.21x	16.39x
S&P 500 EPS Growth	22.5%	4.4%	5.0%
GDP	2.9%	2.6%	2.0%
Inflation	2.0%	1.3%	1.7%
Unemployment Rate	3.9%	3.7%	3.5%

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 June 28, 2019. Note: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. 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	2.9	2.8	2.9	2.4	2.4	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	3.4	3.5	3.8	3.1	3.2	3.2	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	1.8	1.5	1.6	1.3	1.5	1.7	N/A	N/A	N/A	N/A	N/A	N/A
United States	2.6	2.0	1.8	1.3	1.7	2.0	2.15	2.15	2.15	N/A	N/A	N/A
Euro Area	1.1	1.3	1.6	1.2	1.3	1.7	-0.03	0.23	0.75	1.13	1.21	1.30
Japan	0.6	0.1	0.5	0.5	0.6	0.8	-0.11	0.13	0.20	108	100	92
Emerging Markets	4.3	4.6	4.6	4.0	3.7	3.4	N/A	N/A	N/A	N/A	N/A	N/A
China	6.4	6.0	5.8	2.6	2.3	2.0	2.98	2.93	2.93	6.89	6.70	6.23

❮ Swipe left for more

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	2014	2015	2016	2017	2018	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	523	2.1	-4.3	5.6	21.6	-11.2	6.4	2.9	14.9	17.6	15.9	2.5
S&P 500	2942	11.4	-0.7	9.5	19.4	-6.2	6.9	3.8	17.3	19.5	17.9	1.9
DJIA	26600	7.5	-2.2	13.4	25.1	-5.6	7.2	2.6	14.0	17.1	16.6	2.2
NASDAQ	8006	13.4	5.7	7.5	28.2	-3.9	7.4	3.6	20.7	32.1	24.2	1.0
Europe	2954	1.2	3.9	0.7	21.2	-18.5	8.2	5.1	15.3	17.3	14.1	3.6
Japan	3128	7.1	9.1	0.4	21.8	-14.5	3.6	0.8	6.5	13.5	12.8	2.5
Emerging Markets	1055	-4.6	-17.0	8.6	34.3	-16.6	5.7	-0.3	9.2	13.8	13.0	2.7

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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	2014	2015	2016	2017	2018	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
Global	1.50	7.9	0.9	3.3	2.1	0.5	1.3	2.7	5.5	10-Yr. U.S. Treasury	2.01
U.S.	2.53	5.9	0.5	2.7	3.6	0.0	1.2	3.1	6.1	30-Yr. U.S. Treasury	2.53
Europe	0.24	11.2	1.1	3.3	0.5	0.5	1.9	2.9	5.4	1-Yr. CD Rate	1.49
EM Sovereign	5.02	7.1	0.6	9.6	9.8	-4.1	4.0	4.7	11.0	30-Yr. Fixed Mortgage	3.80
U.S. High Yield	6.54	1.8	-5.6	17.8	7.0	-2.1	2.4	2.4	9.9	Prime Rate	5.50

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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)

Watch Video

Mid-Year Outlook 2022 Webcast with Shawn Snyder and Kris Bitterly (57:42)