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Monthly Market Snapshot: June 30, 2022
Highlights
The global rout in both in equities and bonds continued in June with investors still jumpy about the prospects of central bank-induced recessions. The MSCI AC World Index, a broad measure of global stocks, tumbled 8.6% - dragging down the year-to-date return to -20.9%. In the United States, both the S&P 500 and the NASDAQ were down over 8.0% while the Dow Jones held up slightly better with a 6.7% decline. European stocks experienced deep losses with the Euro STOXX 50 retreating 11.0%. Global fixed income returns were negative as well with the FTSE U.S. Broad Investment Grade Bond (USBIG) Index suffering a 1.6% loss during the month. Though it should be noted that bond yields have been falling of late as the balance appears to be tilting more towards growth fears than inflation fears.
Our global equity overweight remains focused on commodity hedges like natural resources, oil field services, and other defensive equities. Away from commodities, Citi Global Wealth Investments’ (CGWI) Global Investment Committee prefers companies with a solid track record of earnings and dividend growth (like consumer staples). We also believe that investors may wish to consider adding long-duration Treasuries (such as the 30-year U.S. Treasury) with yields likely to peak in 2022. We think that this type of defensive portfolio position may be suitable given the current backdrop.
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Regional Outlook
United States
Economy (Possibly Headed Towards Contraction)
The U.S. economy continues to slow. With first-quarter real gross domestic product (GDP) coming in at minus 1.4%, a negative second quarter print (released on July 28) would be two consecutive quarters of decline, which many refer to as a recession. However, the actual definition of a recession according to the National Bureau of Economic Research is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” With consumer spending still making a positive contribution to growth and employment still rising, we would caution against making a recession call just yet. However, if inflation does not start to break, then the odds of a recession will rise.
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 and oil field services. We also want to remind investors that historically, bear markets are often followed by lengthy bull markets.
Bonds (Overweight)
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).
Europe and Japan
Economy (Europe: Possibly Headed Towards Contraction / Japan: Expanding)
Tighter financial conditions and rising inflation forecasts have led to deteriorating growth prospects in Europe. CGWI is forecasting that growth could slip from 4.8% year-on-year in 2021 to 2.3% in 2022. In Japan, supply constraints on autos and home appliances may weigh on second quarter consumer spending. As a result, Citi Research’s economists have revised down their 2022 real GDP forecast from 1.4% to 1.2%.
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 as growth looks likely to decelerate 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 China’s slowing.
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 6.8% year-on-year in 2021 to 3.6% year-on-year in 2022. Citi Research forecasts Russia’s economy to possibly contract by 5.5% in 2022 as sanctions bite. The second quarter may show an annualized contraction of about 29%. China’s economic activities likely bottomed out in May with lockdowns finally easing, but CGWI still anticipates year-on-year growth to slow from 8.0% in 2021 to 4.0% in 2022.
Stocks (Overweight China; Neutral Asia ex China and Latin America; Underweight EMEA)
The GIC remains overweight China but is neutral on Emerging Market Asia ex China. Lockdowns are easing and supply chains are improving. Combined with policy support, 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 Asia fixed income. In local bonds, future returns may be driven by foreign exchange movements.
U.S. Stock Market and Economic Forecasts
| Indicator | 2020A | 2021A | 2022F |
|---|---|---|---|
| S&P 500 Estimate | 3,756 | 4,766 | 4,200 |
| S&P 500 P/E Ratio | 27.43x | 21.6x | 17.8x |
| S&P 500 EPS Growth | -22.1% | 70.1% | 8.4% |
| GDP (YoY) | -3.4% | 5.5% | 1.9% |
| Inflation (YoY) | 1.2% | 3.9% | 5.9% |
| Unemployment Rate | 8.1% | 5.4% | 3.6% |
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 | 3.0 | 2.8 | 3.4 | 6.8 | 4.3 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 6.2 | 3.3 | 3.3 | 4.4 | 8.6 | 5.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 5.1 | 2.4 | 1.8 | 2.9 | 6.2 | 3.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 5.7 | 2.3 | 1.7 | 3.9 | 5.9 | 3.1 | 1.51 | 3.30 | 3.30 | N/A | N/A | N/A |
| Japan | 1.7 | 1.2 | 1.8 | -0.2 | 1.9 | 1.5 | 0.09 | 0.25 | 0.39 | 110 | 131 | 127 |
| Euro Area | 5.3 | 2.5 | 1.9 | 2.6 | 7.9 | 3.6 | -0.30 | 1.02 | 1.46 | 1.18 | 1.05 | 1.07 |
| Emerging Markets | 6.8 | 3.6 | 4.0 | 4.0 | 7.5 | 5.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 8.1 | 3.9 | 4.8 | 0.9 | 2.3 | 2.4 | 2.99 | 2.88 | 3.00 | 7.77 | 7.84 | 7.83 |
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 | 597 | 21.6 | -11.2 | 24.0 | 14.3 | 16.8 | -8.6 | -16.1 | -20.9 | 15.6 | 14.4 | 2.3 |
| S&P 500 | 3785 | 19.4 | -6.2 | 28.9 | 16.3 | 26.9 | -8.4 | -16.4 | -20.6 | 18.9 | 16.5 | 1.7 |
| DJIA | 30775 | 25.1 | -5.6 | 22.3 | 7.2 | 18.7 | -6.7 | -11.3 | -15.3 | 16.6 | 16.0 | 2.2 |
| NASDAQ | 11029 | 28.2 | -3.9 | 35.2 | 43.6 | 21.4 | -8.7 | -22.4 | -29.5 | 37.6 | 23.3 | 0.9 |
| Europe | 2698 | 21.2 | -18.5 | 22.5 | 3.4 | 12.5 | -11.0 | -16.8 | -26.1 | 12.7 | 10.6 | 3.7 |
| Japan | 3036 | 21.8 | -14.5 | 17.1 | 12.2 | -0.1 | -8.0 | -14.8 | -21.2 | 13.8 | 12.3 | 2.5 |
| Emerging Markets | 1001 | 34.3 | -16.6 | 15.4 | 15.8 | -4.6 | -7.1 | -12.4 | -18.8 | 10.8 | 11.2 | 3.0 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2017 | 2018 | 2019 | 2020 | 2021 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 2.95 | 2.1 | 0.5 | 7.1 | 5.7 | -2.1 | -1.8 | -5.2 | -10.4 | 10-Yr. U.S. Treasury | 3.01 |
| U.S. | 3.73 | 3.6 | 0.0 | 8.9 | 7.7 | -1.6 | -1.6 | -4.8 | -10.5 | 30-Yr. U.S. Treasury | 3.18 |
| Europe | 2.09 | 0.5 | 0.5 | 6.0 | 4.1 | -2.9 | -2.3 | -7.1 | -12.1 | 1-Yr. CD Rate | 0.88 |
| EM Sovereign | 8.43 | 9.8 | -4.1 | 14.8 | 5.4 | -2.8 | -7.1 | -12.4 | -21.5 | 30-Yr. Fixed Mortgage | 5.83 |
| U.S. High Yield | 8.98 | 7.0 | -2.1 | 14.1 | 6.3 | 5.4 | -6.8 | -9.9 | -13.8 | Prime Rate | 4.75 |
Asset Class Returns (Sorted by Performance)
