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Monthly Market Snapshot: November 2021
Highlights
Global equity markets stumbled in November with the MSCI All Country World index falling by 2.5% as investors digested the potential for tighter central bank policy and a new COVID variant. In the U.S., the Dow Jones tumbled 3.7% while the NASDAQ eked out a 0.3% gain as investors moved away from cyclicals and towards defensive stocks once again. However, we do not see this as long-term trend. European stocks underperformed –falling 7.0% -as several countries either announced (Austria) or considered (Germany) renewed COVID lockdowns as cases rose once again.
The Omicron variant of the COVID-19 virus further clouds the outlook for financial markets but dealing with COVID is not new (or novel). It will likely take a couple of weeks to discern the efficacy of current vaccines and the transmission rate of the new variant, but it is important to remember that we have learned to fight back through vaccines and social-distancing protocols (if needed). As citizens become more acclimated to Covid, each new wave seems to lead to less market reaction.
Citi’s Global Investment Committee (GIC) kept its asset allocation unchanged with a +6.0% overweight on its Global Equities allocation and a -6.0% underweight on its Fixed Income and Cash allocation.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Expanding)
After growing by an annualized rate of just 2.0% in the third quarter, growth appears to be on track for a print that is north of 5.0% in the fourth quarter as Citi’s economic surprise index is on an uptrend. We envision strong demand to be met with supply-side constraints, raising the prospect for continued inflationary pressures. However, it is still our belief that inflation will moderate to perhaps 3.0% in 2022. Citi Global Wealth is expecting the economy to grow by 3.5% in 2022.
Stocks (Overweight Large-Cap; Underweight SMID)
Citi’s Global Investment Committee (GIC) remains overweight on U.S. large-cap stocks, butmaintains an underweight on small-and middle-cap (SMID) stocks. While we may see market weakness as investors digest the potential for another wave of COVID cases due to Omicron, over the longer-term we believe that corporate profits will rise by a faster rate than inflation. That should imply further gains in 2022. However, volatility may be more elevated as the Fed attempts to normalize monetary policy and considers a first ratehike. The GIC favors higher quality stocks like dividend growers and healthcare.
Bonds (Overweight)
The GIC is underweight short-term U.S. Treasuries, overweight intermediate-duration U.S. Treasuries, and neutral on long-dated Treasuries, and overweight U.S. Treasury-Inflation-Protected Securities (TIPS). Despite numerous calls for higher rates, the 10-year U.S. Treasury yield closed out November at 1.44% as Omicron fears caused a likely temporary flight to safety. Munis are attractive for U.S. investors.
Europe and Japan
Economy (Europe: Expanding / Japan: Recovering)
Growth in the Eurozone has faded somewhat since the summer as supply chain disruptions weighed on the manufacturing recovery. In addition, rising COVID cases heading into winter could also weigh on growth, but we expect supply constraints to ease some in spring which should leave growth still above-trend. Citi Global Wealth is forecasting growth in the European Union to fall from about 4.8% in 2021 to 3.9% in 2022. In Japan, growth looks likely to rise with Citi Research’s economists looking for 1.7% in 2021 and 2.9% in 2022.
Stocks (UK: Overweight; Europe ex UK: Neutral; SMID: Neutral / Japan: Neutral)
The GIC maintains an overweight on UK equities, butis neutral on both Europe ex UK and Japan large-caps. Non-U.S. small-and mid-cap stocks (SMID) are also considered a neutral or slight underweight. In the UK, valuations remain cheapand the FTSE 100 is largely comprised of value-oriented names. In broader Europe, the potential for social-distancing protocols this winter and exporters’ potential exposure to a slowdown in China leave us neutral on the region. In Japan, stocks that benefit from global trends like digitization could outperform, but we remain neutral on the region as a whole.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Recovering)
Citi Research’s growth forecast for emerging markets remains at 6.6% year-on-year in 2021 and at 4.5% year-on-year in 2022. However, concerns are rising that China’s economy could slow in coming quarters with growth expected to slip from 8.0% in 2021 to 4.5% in 2022.
Stocks (Overweight Asia ex-China and China; Neutral Latin America; Underweight EMEA)
The GIC is overweight on both Emerging Market Asia ex China and China. However, we are neutral on Latin America and underweight Emerging Europe, Middle East, and Africa (EMEA) as emerging market stocks are facing a “double-whammy” of tighter Fed policy and slower growth in China.
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 | 2021F | 2022F |
|---|---|---|---|
| S&P 500 Target | 3,300 | 4,600 | 4,900 |
| S&P 500 P/E Ratio | 27.43x | 23.1x | 21.3x |
| S&P 500 EPS Growth | -13.5% | 43.1% | 8.3% |
| GDP (YoY) | -3.4% | 5.6% | 4.0% |
| Inflation (YoY) | 1.2% | 3.6% | 2.7% |
| Unemployment Rate | 8.1% | 5.4% | 3.9% |
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.
Note 3: 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.
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 | 5.6 | 4.2 | 3.1 | 3.2 | 3.4 | 2.6 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 6.0 | 4.4 | 3.5 | 4.2 | 4.2 | 3.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 4.9 | 3.9 | 2.2 | 2.7 | 2.7 | 1.7 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 5.5 | 4.0 | 1.8 | 3.6 | 2.7 | 2.0 | 2.00 | 2.25 | 2.25 | N/A | N/A | N/A |
| Japan | 1.7 | 2.9 | 1.4 | -0.2 | 1.0 | 0.7 | 0.07 | 0.15 | 0.15 | 112 | 115 | 113 |
| Euro Area | 5.1 | 3.9 | 3.0 | 2.5 | 2.8 | 1.5 | -0.30 | -0.11 | 0.16 | 1.16 | 1.12 | 1.12 |
| Emerging Markets | 6.6 | 4.5 | 4.2 | 3.8 | 4.3 | 3.8 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 8.1 | 4.7 | 4.8 | 0.8 | 2.0 | 2.4 | 3.02 | 2.89 | 3.00 | 6.45 | 6.28 | 5.77 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2016 | 2017 | 2018 | 2019 | 2020 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 727 | 5.6 | 21.6 | -11.2 | 41.8 | 14.3 | -2.5 | 2.4 | 12.4 | 20.6 | 18.4 | 1.8 |
| S&P 500 | 4567 | 9.5 | 19.4 | -6.2 | 49.8 | 16.3 | -0.8 | 6.0 | 21.6 | 25.4 | 22.1 | 1.3 |
| DJIA | 34484 | 13.4 | 25.1 | -5.6 | 31.2 | 7.2 | -3.7 | 1.9 | 12.7 | 19.5 | 17.9 | 1.8 |
| NASDAQ | 15538 | 7.5 | 28.2 | -3.9 | 94.2 | 43.6 | 0.3 | 7.5 | 20.6 | 91.2 | 34.4 | 0.6 |
| Europe | 3416 | 0.7 | 21.2 | -18.5 | 26.7 | 3.4 | -7.0 | -2.5 | 5.2 | 18.3 | 16.0 | 2.5 |
| Japan | 3784 | 0.4 | 21.8 | -14.5 | 31.3 | 12.2 | -2.5 | -5.8 | -1.8 | 14.7 | 14.6 | 2.2 |
| Emerging Markets | 1212 | 8.6 | 34.3 | -16.6 | 33.7 | 15.8 | -4.1 | -3.2 | -6.1 | 13.7 | 12.8 | 2.5 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2016 | 2017 | 2018 | 2019 | 2020 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.03 | 3.3 | 2.1 | 0.5 | 7.1 | 5.7 | 0.7 | 0.5 | -1.4 | 10-Yr. U.S. Treasury | 1.44 |
| U.S. | 1.67 | 2.7 | 3.6 | 0.0 | 8.9 | 7.7 | 0.3 | 0.3 | -1.3 | 30-Yr. U.S. Treasury | 1.79 |
| Europe | 0.09 | 3.3 | 0.5 | 0.5 | 6.0 | 4.1 | 1.3 | 0.6 | -1.7 | 1-Yr. CD Rate | 0.28 |
| EM Sovereign | 5.13 | 9.6 | 9.8 | -4.1 | 14.8 | 5.4 | -2.3 | -2.0 | -4.5 | 30-Yr. Fixed Mortgage | 3.23 |
| U.S. High Yield | 5.24 | 17.8 | 7.0 | -2.1 | 14.1 | 6.3 | -1.1 | -1.2 | 3.3 | Prime Rate | 3.25 |
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.
