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Monthly Market Snapshot: November 2020
Highlights
Globally, stocks surged in November as positive vaccine news and fading U.S. political uncertainty. In the United States, the S&P 500 soared 10.8% while the Dow Jones jumped 11.8%. The tech-heavy NASDAQ rose 11.8%. European shares ripped 21.2% higher as the number of new COVID-19 cases in the region seemingly plateaued and restrictions looked set to ease. The 10-year U.S. Treasury yield remained little changed at 0.84%.
Vaccine developments have bolstered confidence that there is a light at the end of the tunnel. Barring an unexpected setback, a broad distribution of vaccines in 2021 should help the global economy to more fully recover. Combined with the a base case of a divided U.S. government, this boosted risk assets significantly. Some of next year’s returns might have been pulled forward.
Citi Private Bank’s Global Investment Committee maintains an overweight on global equities, particularly on non-U.S. large cap shares (Japan, Europe, and the UK) and small-cap shares. The Committee maintains an underweight on global fixed income, particularly European and Japanese sovereign bonds and short-duration U.S. Treasuries. The GIC is now neutral on emerging market debt.
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Regional Outlook
United States
Economy (Recovering)
The U.S. economy continues to recover with real GDP in the fourth quarter looking like it will range between 4.0% to 6.0% annualized. Growth may moderate further in the first quarter of 2021 as COVID-19 restrictions weigh on growth, but vaccines should lead to above trend growth in 2021 with annual GDP clocking in between 4% to 5.0%. Additional fiscal stimulus from Congress appears to be forthcoming, perhaps by December 18th. This should help to support growth.
Stocks (Overweight SMID)
Citi Private Bank’s Global Investment Committee is neutral on U.S. large-cap stocks, but remains overweight U.S. small- and mid-cap shares (SMID). Significant stimulus from the Fed and U.S. congress boosted markets after a significant drop in March, but valuations are no longer cheap. We remain focused on areas of the market that still offer some value – particularly Cyclicals sectors like Industrials, Financials, and Real Estate Investment Trusts Securities (REITS).
Bonds (Underweight)
With yields quite low, the GIC is underweight short-duration and neutral on intermediate-duration and long-duration U.S. Treasuries. The Committee remains overweight Treasury-Inflation Protected Securities and U.S. residential- and commercial-mortgage REITS. Overall, we expect some rebound in rates in a 2021 cyclical recovery. For taxable U.S. investors, muni yields are relatively attractive.
Europe and Japan
Economy (Europe: Recovering / Japan: Recovering)
In Europe, a negative real GDP print in the fourth quarter is possible, but vaccines should lead to a material increase in the pace of economic activity in the second half of 2021. This should allow the European Union’s economy to grow by about 3.5% to 4.0% next year. In Japan, Citi’s economists expect continued economic expansion in 2021 after a temporary pause in the first quarter following a recent COVID-19 surge. For the full year, an annual growth rate of 2.0% seems feasible.
Stocks (Europe: Overweight; Overweight SMID / Japan: Overweight; Overweight SMID)
The GIC has moved to an overweight on both Europe and Japan large-caps, as well as small- and mid-cap stocks (SMID). COVID infections are holding back the near-term pace of the recovery, but the European Union appears poised to benefit from a global trade recovery and cheaper valuations relative to U.S. large cap shares. Japanese large cap stocks also appear poised to benefit from a trade and subsequent upward earnings-per-share (EPS) revisions in the coming year.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Recovering)
Citi’s economists expect emerging market economies to rebound as well with growth possibly rising from -2.0% to 6.2%. Although we should note that vaccine rollouts in EM may take longer than in advanced economies. In China, growth looks set to rise from 2.1% in 2020 to 8.2% in 2021 as household consumption drives growth.
Stocks (Overweight)
The GIC is overweight emerging markets (Asia and Latin America). The GIC remains optimistic on Asian consumption, technology and healthcare themes. Latin America could perform well coming out of this crisis. However, we maintain a cautious stance longer-term.
Bonds (Neutral)
We are neutral 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
| Indicator | 2019A | 2020F | 2021F |
|---|---|---|---|
| S&P 500 Target | 3,231 | 3,300 | 3,800 |
| S&P 500 P/E Ratio | 18.97x | 25.87x | 21.96x |
| S&P 500 EPS Growth | 2.0% | -16.8% | 21.9% |
| GDP (YoY) | 2.2% | -3.4% | 5.1% |
| Inflation (YoY) | 1.5% | 1.2% | 1.9% |
| Unemployment Rate | 3.7% | 8.1% | 5.9% |
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | |
| Global | -3.9 | 5.0 | 3.6 | 2.0 | 2.2 | 2.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | -3.7 | 5.5 | 3.7 | 2.8 | 3.2 | 3.3 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | -5.3 | 4.1 | 2.8 | 0.7 | 1.3 | 1.7 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | -3.4 | 5.1 | 1.6 | 1.2 | 1.9 | 2.0 | 1.25 | 1.25 | 1.25 | N/A | N/A | N/A |
| Japan | -5.1 | 2.0 | 2.3 | 0.1 | -0.3 | 0.6 | 0.03 | 0.05 | 0.05 | 107 | 107 | 107 |
| Euro Area | -7.3 | 3.6 | 4.3 | 0.2 | 0.7 | 1.3 | -0.50 | -0.40 | -0.17 | 1.15 | 1.22 | 1.25 |
| Emerging Markets | -2.0 | 6.2 | 4.5 | 3.7 | 3.3 | 3.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 2.1 | 8.2 | 5.5 | 2.6 | 1.2 | 2.2 | 3.00 | 3.21 | 3.23 | 6.89 | 6.30 | 6.05 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 618 | -4.3 | 5.6 | 21.6 | -11.2 | 24.0 | 12.2 | 9.4 | 9.4 | 31.4 | 24.3 | 1.9 |
| S&P 500 | 3622 | -0.7 | 9.5 | 19.4 | -6.2 | 28.9 | 10.8 | 7.7 | 12.1 | 29.0 | 26.2 | 1.6 |
| DJIA | 29639 | -2.2 | 13.4 | 25.1 | -5.6 | 22.3 | 11.8 | 6.7 | 3.9 | 25.2 | 24.8 | 2.1 |
| NASDAQ | 12199 | 5.7 | 7.5 | 28.2 | -3.9 | 35.2 | 11.8 | 9.7 | 36.0 | 74.2 | 40.5 | 0.8 |
| Europe | 3120 | 3.9 | 0.7 | 21.2 | -18.5 | 22.5 | 21.2 | 11.6 | -0.6 | 52.0 | 23.1 | 2.2 |
| Japan | 3706 | 9.1 | 0.4 | 21.8 | -14.5 | 17.1 | 12.5 | 10.7 | 7.8 | 29.2 | 22.7 | 2.1 |
| Emerging Markets | 1205 | -17.0 | 8.6 | 34.3 | -16.6 | 15.4 | 9.2 | 11.4 | 8.1 | 24.7 | 19.5 | 2.0 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 0.57 | 0.9 | 3.3 | 2.1 | 0.5 | 7.1 | 0.6 | 0.6 | 5.5 | 10-Yr. U.S. Treasury | 0.84 |
| U.S. | 1.06 | 0.5 | 2.7 | 3.6 | 0.0 | 8.9 | 1.1 | 0.6 | 7.6 | 30-Yr. U.S. Treasury | 1.57 |
| Europe | -0.12 | 1.1 | 3.3 | 0.5 | 0.5 | 6.0 | 0.3 | 1.1 | 3.9 | 1-Yr. CD Rate | 0.41 |
| EM Sovereign | 4.36 | 0.6 | 9.6 | 9.8 | -4.1 | 14.8 | 4.2 | 3.8 | 3.4 | 30-Yr. Fixed Mortgage | 2.94 |
| U.S. High Yield | 5.40 | -5.6 | 17.8 | 7.0 | -2.1 | 14.1 | 3.9 | 4.4 | 4.2 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
