A Jumbo July

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Monthly Market Snapshot: July 2020

Highlights

Stocks across most markets experienced solid gains with the MSCI All Country World Index rising an impressive 5.1% in July. In the United States, the S&P 500 edged 5.5% higher while the tech-heavy NASDAQ jumped another 6.8%. Returns for the S&P 500 and NASDAQ are now positive year-to-date. The 10-year U.S. Treasury yield fell 13 basis points to 0.53%.

The resurgence of COVID-19 may have dampened economic activity in July, but most signs still point to a continued economic recovery. Citi’s U.S. economists are expecting growth to rebound by an annualized rate that is north of 20% in the third quarter. However, we would need an annualized rate of about 50% to return to pre-COVID levels. A full economic recovery will likely not occur until 2021, but the stock market generally moves ahead of the economy.

Citi Private Bank’s Global Investment Committee (GIC) maintains an overweight on global equities, including U.S. small-cap shares, and select emerging markets (in Asia and Latin America). The GIC is also overweight select real estate investment trusts (REITS). European and Japanese stocks are being held at a neutral weighting.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

The U.S. economy experienced a deep contraction in the second quarter as a public-health crisis led to broad shutdown of the economy. Importantly, data point to a solid rebound in the third quarter. Citi’s economists believe that the annualized pace of growth in the third quarter could be north of 20.0%. We do not expect the renewed rise in COVID-19 cases to lead to a second period of economic contraction.

Stocks (Neutral; Overweight SMID)

Citi Private Bank’s Global Investment Committee maintains a neutral position on large-cap U.S. stocks, but is overweight U.S. small- and mid-cap shares (SMID). Small cap shares may play “catch-up” as the economy exits recession. Over the 12- to 18-month time horizon, we expect cyclical industries like industrials to recover. However, we may need to see a sustained decline in the rate of infections before a more pronounced rotation into cyclicals occurs.

Bonds (Overweight)

The Federal Reserve has repeatedly said that it will do whatever it takes to support the economy. This will likely keep rates low for a long time. Citi’s GIC maintains an overweight on short- and intermediate-duration Treasuries, but is neutral on long-duration. The Committee is also overweight investment grade corporate bonds and U.S. residential REITS and commercial mortgage REITS. The GIC remains neutral on municipal bonds.

Europe and Japan

Economy (Europe: Recovering / Japan: Recovering)

Citi’s economists left their 2020 Euro Area growth forecast unchanged at -6.7%. With only a few restrictions left in place following the lockdown, the region should see a strong rebound in the second half of 2020. Citi’s growth forecast for 2021 is 6.5%. In Japan, growth looks like it may fall by -5.2% in 2020 before rebounding by 2.5% in 2021.

Stocks (Europe: Neutral / Japan: Neutral)

The GIC is neutral on both Europe and Japan. The European Union has unified around a stronger fiscal expansion. After Eurozone equities fell sharply, the GIC has eliminated its underweight position and may consider adding to positions further as time progresses. In Japan, we see strong fiscal policy as a tailwind, but see better opportunities elsewhere.

Bonds (Underweight)

The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.

Emerging Markets

Economy (Recovering)

The economic outlook for emerging markets looks better than many industrial economies with 2020 growth likely to fall -1.5% (versus -5.1% for industrial countries). However, Citi’s economists revised down their growth forecasts for China – from 6.2% to 5.9% in the second half. While the trade outlook may improve as the world exits lockdown, consumer spending may be held back due to an uncertain future.

Stocks (Overweight)

The GIC is overweight emerging markets (Asia and Latin America). Chinese shares, particularly those in the technology and internet sector, have risen sharply in recent months. While we may see some consolidation near-term, after such a sharp rally, we remain long term optimistic on Asian consumption, technology and healthcare themes. Latin America could perform well coming out of the crisis. However, we maintain a cautious stance longer-term. We see it as a recovery trade.

Bonds (Overweight)

We are overweight emerging market fixed income as U.S. dollar-denominated debt valuations reflect poor fundamentals, but also long-term opportunities and attractive risk adjusted returns.

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	3,231	2,900
S&P 500 P/E Ratio	15.43x	18.97x	25.97x
S&P 500 EPS Growth	22.50%	2.00%	-24.00%
GDP (YoY)	2.90%	2.30%	-3.30%
Inflation (YoY)	2.00%	1.40%	1.00%
Unemployment Rate	3.90%	3.70%	8.20%

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 July 31, 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	2.6	-3.7	5.6	2.4	1.9	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	3.0	-3.3	5.9	3.2	2.7	3.2	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	1.7	-5.1	4.9	1.3	0.6	1.5	N/A	N/A	N/A	N/A	N/A	N/A
United States	2.3	-3.3	4.4	1.4	1.0	2.0	1.75	1.25	1.25	N/A	N/A	N/A
Japan	0.7	-5.2	2.5	0.5	0.0	0.1	-0.10	0.03	0.06	109	108	108
Euro Area	1.2	-6.8	6.5	1.2	0.4	1.3	-0.25	-0.41	-0.18	1.12	1.13	1.18
Emerging Markets	3.8	-1.9	6.5	3.9	3.6	3.5	N/A	N/A	N/A	N/A	N/A	N/A
China	6.1	2.4	8.2	2.9	2.7	2.0	2.99	2.63	2.67	6.91	7.00	6.79

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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	552	-4.3	5.6	21.6	-11.2	24.0	5.1	5.1	-2.4	24.8	22.7	2.2
S&P 500	3271	-0.7	9.5	19.4	-6.2	28.9	5.5	5.5	1.2	25.4	25.7	1.8
DJIA	26428	-2.2	13.4	25.1	-5.6	22.3	2.4	2.4	-7.4	22.1	24.2	2.4
NASDAQ	10745	5.7	7.5	28.2	-3.9	35.2	6.8	6.8	19.8	58.7	38.3	0.9
Europe	2803	3.9	0.7	21.2	-18.5	22.5	3.3	3.3	-10.7	30.1	20.7	2.7
Japan	3105	9.1	0.4	21.8	-14.5	17.1	-1.6	-1.6	-9.7	21.7	18.8	2.5
Emerging Markets	1079	-17.0	8.6	34.3	-16.6	15.4	8.4	8.4	-3.2	18.4	17.6	2.5

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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	0.57	0.9	3.3	2.1	0.5	7.1	1.2	1.2	5.3	10-Yr. U.S. Treasury	0.53
U.S.	0.96	0.5	2.7	3.6	0.0	8.9	1.6	1.6	7.9	30-Yr. U.S. Treasury	1.19
Europe	0.08	1.1	3.3	0.5	0.5	6.0	1.1	1.1	2.3	1-Yr. CD Rate	0.46
EM Sovereign	4.42	0.6	9.6	9.8	-4.1	14.8	3.8	3.8	1.1	30-Yr. Fixed Mortgage	3.09
U.S. High Yield	6.16	-5.6	17.8	7.0	-2.1	14.1	5.0	5.0	0.0	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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