Monthly Market Snapshot: May 31, 2022
After a rough start, both equities and bonds performed a bit better towards the end of May. The MSCI AC World Index, a broad measure of global stocks, finished the month a touch higher – up 0.1% in May. In the United States, the NASDAQ added 2.1% while the S&P 500 and Dow Jones were essentially flat. While far from a stellar performance, a leveling off may suggest that much of the recent equity market sell-off is behind us. Global fixed income returns were mixed, but the FTSE U.S. Broad Investment Grade Bond (USBIG) Index returned 0.5% during the month – the first positive monthly return since November 2021. This likely reflects a shift in a focus away from inflation and towards slowing growth. Commentary from the Federal Reserve will remain extremely important as investors try to decipher just how far the Fed is willing to go to fight inflation.
Our global equity overweight is focused in 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 tilt has potential in the current environment.
The U.S. economy is cooling off as both fiscal and monetary policy supports are being removed. The economy appears to still be expanding, but the path of the expansion will depend on how far the Federal Reserve is willing to go to fight inflation. Tighter financial conditions will likely lead to a further slowing in consumer spending as consumers draw upon personal savings and adjust their spending patterns to lessen the blow from rising prices. The labor market remains tight. CGWI expects growth to decelerate from about 5.5% year-on-year in 2021 to perhaps 1.9% in 2022.
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 which may benefit from the conflict between Russia and Ukraine. The Committee is underweight small- and middle-cap (SMID) stocks.
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)
Business confidence has remained resilient in the face of numerous challenges, but consumer confidence has dipped into recession-like territory. There is a growing chance that the economy stagnates throughout the rest of 2022 and possibly into 2023. CGWI is forecasting that growth could slip from 4.8% year-on-year in 2021 to 2.3% in 2022. Japan may face a drop in exports and industrial production in 2Q 2022 as China’s lockdowns impact the region. As a result, Citi Research’s economists have revised down their 2022 real GDP forecast from 2.0% to 1.4%.
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. 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.
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. Citi Research expects Russia’s economy to possibly contract by 5.5% in 2022 as sanctions take their toll. The second quarter will likely show a very deep contraction. The path for China’s economy will depend on significant stimulus but CGWI expects year-on-year growth to slow from 8.0% in 2021 to about 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. There are early signs that public health conditions and supply chains may be 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 fixed income, specifically Asia. 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||4,700|
|S&P 500 P/E Ratio||27.43x||21.6x||18.1x|
|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||6.1||3.3||3.4||4.4||8.3||5.2||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||2.51||2.1||0.5||7.1||5.7||-2.1||-0.3||-3.5||-8.7||10-Yr. U.S. Treasury||2.84|
|U.S.||3.32||3.6||0.0||8.9||7.7||-1.6||0.5||-3.3||-9.1||30-Yr. U.S. Treasury||3.05|
|Europe||1.54||0.5||0.5||6.0||4.1||-2.9||-1.5||-4.9||-10.0||1-Yr. CD Rate||0.80|
|EM Sovereign||7.34||9.8||-4.1||14.8||5.4||-2.8||0.0||-5.8||-15.5||30-Yr. Fixed Mortgage||5.35|
|U.S. High Yield||7.19||7.0||-2.1||14.1||6.3||5.4||0.1||-3.4||-7.6||Prime Rate||4.00|
Asset Class Returns (Sorted by Performance)