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Monthly Market Snapshot: March 31, 2022
Highlights
The actions taken in March 2022 may have lasting consequences with the Federal Reserve embarking on a new tightening cycle and the ongoing conflict between Russia and Ukraine likely to shift global supply chains. Nevertheless, global equities marched higher with the MSCI AC World Index rising 1.9%. U.S. stocks performed particularly well with the S&P 500 and NASDAQ climbing 3.6% and 3.4%, respectively. While still down year-to-date, falling crude oil prices have helped stocks to the stage an impressive rally over the last couple of weeks. Outside of the U.S., stocks were mostly lower with European stocks dropping 1.5% while Japanese stocks dipped 1.4%.
U.S. Treasuries experienced a sharp sell-off as investors responded to hawkish comments from the Federal Reserve. This was felt acutely in the 2-year U.S. Treasury yield which surged from 1.43% to 2.33% and briefly topped the 10-year U.S. Treasury yield – often referred to as an inversion of the yield curve. While an inversion of the yield curve can be a predictor of a U.S. recession, one does not appear imminent.
In early March, Citi’s Global Investment Committee (GIC) decided to add a 4% portfolio weighting to global natural resources as a defensive hedge. We also reinstated a 2.0% overweight to gold. These additions were largely funded by a reduction in the allocation to both European and Japanese stocks.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Expanding)
Steady job and wage growth are supporting the economic outlook, but the tailwind from fiscal stimulus is waning and the Federal Reserve is seeking to dampen demand to bring down inflation. That could lead to concerns about slowing growth later in the year. We expect the Fed to raise rates by 50-basis-points at its next meeting and then by 25-basis-points at each following meeting. Though we can’t rule out back-to-back 50-basis-point hikes. We expect the Fed to continue to tighten until inflation begins to slow sharply.
Stocks (Slightly Overweight Large-Cap; Underweight SMID)
Citi’s Global Investment Committee believes that corporate profits will be solid this year, but tighter monetary policy through both rate hikes and balance sheet reduction is making us somewhat cautious. While maintaining a slight overweight, we prefer higher quality stocks like dividend growers, healthcare, and consumer staples. The Committee is underweight small- and middle-cap (SMID) stocks.
Bonds (Overweight)
The GIC is underweight short-term U.S. Treasuries, overweight intermediate-duration U.S. Treasuries, and neutral on long-dated Treasuries. We also remain overweight U.S. Treasury-Inflation-Protected Securities (TIPS). The Committee’s overweight to intermediate-duration Treasuries and Investment Grade Corporate debt is largely viewed as a risk hedge should the outlook worsen.
Europe and Japan
Economy (Europe: Possibly Headed Towards Contraction / Japan: Expanding)
Russia’s invasion of Ukraine is likely to create severe headwinds for the Euro Area as the region remains highly reliant on Russian energy supplies. Even though Russian supplies have not been sanctioned by the Euro Area, energy has become more expensive, and the economic union will need to make large scale investments to limit dependence of Russia’s fossil fuels. We think it’s possible that the region experiences a quarter or two of economic contraction. Economic headwinds in Europe and Russia could also dampen growth in Japan. As such, Citi Research’s economists have revised down their 2022 real GDP forecast from 2.5% to 2.1%.
Stocks (Neutral UK; Underweight Europe ex UK; Underweight SMID / Underweight Japan)
The GIC moved from an overweight on Europe ex UK and Switzerland large-cap equities to an underweight position in early March. The Committee also brought down its allocation to UK equities to a neutral. We remain underweight on non-U.S. small- and mid-cap stocks (SMID). We also downgraded Japanese stocks to underweight.
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 6.7% year-on-year in 2021 to 4.5% year-on-year in 2022. Citi Research expects Russia’s economy to possibly contract by 9.6% in 2022 as sanctions take their toll. The path for China’s economy will depend on significant stimulus efforts but seems likely to slow from 8.1% in 2021 to about 4.7% in 2022.
Stocks (Overweight China; Neutral Asia ex China and Latin America; Underweight EMEA)
The GIC remains overweight China but has downgraded its view of Emerging Market Asia ex China from overweight to neutral. China’s macroeconomic policies are easing, and the region is somewhat insulated from rising geopolitical tensions. 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
| Indicator | 2020A | 2021A | 2022F |
|---|---|---|---|
| S&P 500 Estimate | 3,756 | 4,766 | 4,700 |
| S&P 500 P/E Ratio | 27.43x | 21.6x | 20.0x |
| S&P 500 EPS Growth | -13.5% | 46.8% | 8.0% |
| GDP (YoY) | -3.4% | 5.7% | 3.3% |
| Inflation (YoY) | 1.2% | 3.9% | 5.7% |
| Unemployment Rate | 8.1% | 5.4% | 3.7% |
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 | 3.3 | 3.1 | 3.4 | 6.1 | 3.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 6.1 | 3.4 | 3.5 | 4.4 | 6.7 | 4.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 5.1 | 3.0 | 2.2 | 2.9 | 5.5 | 2.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 5.7 | 3.3 | 2.1 | 3.9 | 5.7 | 2.5 | 1.51 | 2.00 | 2.00 | N/A | N/A | N/A |
| Japan | 1.6 | 2.1 | 2.1 | -0.2 | 1.5 | 1.2 | 0.08 | 0.20 | 0.34 | 110 | 116 | 114 |
| Euro Area | 5.3 | 2.3 | 2.6 | 2.6 | 6.5 | 2.7 | -0.30 | 0.27 | 0.37 | 1.18 | 1.09 | 1.11 |
| Emerging Markets | 6.7 | 3.7 | 4.2 | 4.0 | 6.8 | 4.6 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 8.1 | 4.7 | 4.8 | 0.9 | 2.3 | 2.4 | 2.99 | 2.89 | 3.00 | 6.45 | 6.43 | 6.01 |
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 | 712 | 21.6 | -11.2 | 24.0 | 14.3 | 16.8 | 1.9 | -5.7 | -5.7 | 19.0 | 17.1 | 1.9 |
| S&P 500 | 4530 | 19.4 | -6.2 | 28.9 | 16.3 | 26.9 | 3.6 | -4.9 | -4.9 | 23.3 | 20.1 | 1.4 |
| DJIA | 34678 | 25.1 | -5.6 | 22.3 | 7.2 | 18.7 | 2.3 | -4.6 | -4.6 | 18.4 | 18.2 | 1.9 |
| NASDAQ | 14221 | 28.2 | -3.9 | 35.2 | 43.6 | 21.4 | 3.4 | -9.1 | -9.1 | 58.5 | 29.3 | 0.7 |
| Europe | 3243 | 21.2 | -18.5 | 22.5 | 3.4 | 12.5 | -1.5 | -11.2 | -11.2 | 15.2 | 13.3 | 2.5 |
| Japan | 3563 | 21.8 | -14.5 | 17.1 | 12.2 | -0.1 | -1.4 | -7.5 | -7.5 | 13.8 | 13.5 | 2.2 |
| Emerging Markets | 1142 | 34.3 | -16.6 | 15.4 | 15.8 | -4.6 | -2.5 | -7.3 | -7.3 | 13.2 | 12.4 | 2.5 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2017 | 2018 | 2019 | 2020 | 2021 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 2.15 | 2.1 | 0.5 | 7.1 | 5.7 | -2.1 | -2.3 | -5.4 | -5.4 | 10-Yr. U.S. Treasury | 2.34 |
| U.S. | 3.05 | 3.6 | 0.0 | 8.9 | 7.7 | -1.6 | -2.7 | -6.0 | -6.0 | 30-Yr. U.S. Treasury | 2.45 |
| Europe | 0.97 | 0.5 | 0.5 | 6.0 | 4.1 | -2.9 | -2.2 | -5.4 | -5.4 | 1-Yr. CD Rate | 0.34 |
| EM Sovereign | 6.62 | 9.8 | -4.1 | 14.8 | 5.4 | -2.8 | -1.0 | -10.3 | -10.3 | 30-Yr. Fixed Mortgage | 4.90 |
| U.S. High Yield | 6.36 | 7.0 | -2.1 | 14.1 | 6.3 | 5.4 | -0.8 | -4.4 | -4.4 | Prime Rate | 3.50 |
Asset Class Returns (Sorted by Performance)
Note 1: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.
Note 1: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.