Monthly Market Snapshot: July 31, 2022
The global equity market rebounded in July as investors digested lower commodity prices, lower Treasury yields, stable U.S. corporate profits, and the potential for a less aggressive Federal Reserve. The MSCI AC World Index, a broad measure of global stocks, surged 6.9% - though the year-to-date return remains negative at -15.5%. In the United States, the S&P 500 jumped 9.1% while the beaten-down NASDAQ recovered 12.3% as Treasury yields retreated on lowered inflation and growth expectations. International returns were more subdued with the Euro STOXX 50 adding 4.7% and the MSCI Japan Index gaining 5.7%. Global fixed income returns were positive as well with the FTSE World Broad Investment Grade Bond (USBIG) index recouping 2.7%.
Citi Global Wealth Investments’ (CGWI) Global Investment Committee lowered its global equity weighting to neutral by bringing down its exposure to oil field services and fintech. Our remaining tactical overweight positions include natural resource stocks, global pharmaceuticals and healthcare, and dividend growers (like consumer staples). Our global fixed income underweight was reduced from -3% to -1% as we added exposure to intermediate-term U.S. corporate bonds and preferred stock.
Economy (Possibly Headed Towards Contraction)
The U.S. economy logged two consecutive quarters of negative growth in the first half of 2022. This is often a trend that is consistent with a recession, but monthly employment prints have remained strong, which is not a trend that is consistent with recession. The path of the economy remains highly dependent on monetary policy. We envision at least one more 50 basis-point rate hike from the Federal Reserve in September. If the Fed continues to raise interest rates in 2023, the odds of a recession will likely rise. On the upside, headline inflation may have finally peaked with commodity prices having come down.
Stocks (Slightly Overweight Large-Cap; Underweight SMID)
CGWI’s Global Investment Committee (GIC) is maintaining a defensive tilt with a preference towards higher quality stocks like dividend-growers, healthcare, and consumer staples. The Committee also holds a thematic overweight in natural resources. We did reduce our position in oil field services from overweight to neutral as we think the space could be at risk if a recession were to occur.
The GIC is underweight short-term U.S. Treasuries but overweight intermediate- and long-duration U.S. Treasuries (30-year tenure). We believe that yields are likely to peak in 2022 and may serve as a portfolio hedge should equity market volatility worsen. We also remain overweight U.S. Treasury-Inflation-Protected Securities (TIPS). The Committee added exposure to preferred stock as we lean into quality.
Europe and Japan
Economy (Europe: Possibly Headed Towards Contraction / Japan: Expanding)
The sharp rise in natural gas prices and electricity prices might trigger a mild recession this winter with Germany likely to suffer the brunt of the impact. As a result, CGWI is forecasting that growth could slip from 4.8% year-on-year in 2021 to 2.3% in 2022. We expect growth to be even weaker in 2023. In Japan, slowing U.S. manufacturing may weigh on the region’s exports. Though it should be noted that unlike other central banks, the Bank of Japan remains on hold. As a result, Citi Research’s economists have revised down their 2022 real GDP forecast from 1.2% to 0.8%. Growth may rebound in 2023.
Stocks (Neutral UK; Underweight Europe ex UK; Underweight SMID / Underweight Japan)
The GIC moved to an underweight position on Europe ex UK and Switzerland in early March. We expect growth to weaken as rising energy costs take their toll. The Committee is neutral on UK equities. We remain underweight on non-U.S. small- and mid-cap stocks (SMID). We are also underweight Japanese stocks as the region grapples with a slowing in major trade partners (China and the United States).
The GIC maintains a deep underweight on both European and Japanese sovereign bonds.
Citi Research’s economists expect emerging market economies to slow from 6.8% year-on-year in 2021 to 3.6% year-on-year in 2022. Growth may rebound in 2023 as China’s stimulus takes hold. Russia’s economy remains uniquely exposed with growth possibly set to fall by an annualized 29% in the second quarter. China’s recovery remains on track, but the property sector and youth unemployment bears watching. CGWI still believes that year-on-year growth will climb from 4.0% in 2022 to 5.0% in 2023.
Stocks (Overweight China; Neutral Asia ex China and Latin America; Underweight EMEA)
The GIC added to its overweight in China as the economy looks set to recover as supply chains improve. However, we are neutral on Emerging Market Asia ex China. We are also 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 Asia fixed income. In local bonds, future returns may be driven by foreign exchange movements.
U.S. Stock Market and Economic Forecasts
|S&P 500 Estimate||3,756||4,766||4,200|
|S&P 500 P/E Ratio||27.43x||21.6x||17.2x|
|S&P 500 EPS Growth||-22.1%||70.1%||8.4%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||6.2||3.2||3.3||4.4||8.8||6.0||N/A||N/A||N/A||N/A||N/A||N/A|
|Equity Returns (%)||Valuations||Div. Yld. (%)|
|Fixed Income Returns (%)||Other Key Rates|
|Fixed Income||YTM||2017||2018||2019||2020||2021||MTD||QTD||YTD||Instrument||Current (%)|
|Global||2.63||2.1||0.5||7.1||5.7||-2.1||2.7||2.7||-7.9||10-Yr. U.S. Treasury||2.65|
|U.S.||3.45||3.6||0.0||8.9||7.7||-1.6||2.3||2.3||-8.5||30-Yr. U.S. Treasury||3.01|
|Europe||1.58||0.5||0.5||6.0||4.1||-2.9||4.1||4.1||-8.5||1-Yr. CD Rate||1.22|
|EM Sovereign||8.07||9.8||-4.1||14.8||5.4||-2.8||3.0||3.0||-19.1||30-Yr. Fixed Mortgage||5.28|
|U.S. High Yield||7.79||7.0||-2.1||14.1||6.3||5.4||6.0||6.0||-8.6||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)