Monthly Market Snapshot: October 2021
Global equity markets powered forward in October – logging their best gains since November 2020 with the MSCI All Country World index surging 5.0%. In the U.S., the S&P 500 rocketed 7.0% higher as debt ceiling fears lifted, corporate earnings beat expectations, and strong seasonal factors kicked in. The NASDAQ, which has been sensitive to rising bond yields, jumped by 7.3%. Japanese stocks underperformed – falling 3.4% as economic growth forecasts dimmed. The 10-year U.S. Treasury yield edged higher – rising from 1.49% to 1.55% by month-end as investors considered a tapering of Fed bond purchases and persistent inflation.
Strong corporate earnings and an easing of debt ceiling fears helped to drive stock prices higher in October. While the U.S. will likely be forced to lift the debt ceiling yet again towards year-end, the removal of the immediate threat led to a more risk-on tone as early corporate earnings reports showed that profits remain robust and on track to rise by about 46% in FY2021.
Citi’s Global Investment Committee (GIC) reduced its overweight to Global Equities from +8.0% to +6.0% and raised its Fixed Income and Cash allocation from a -8.0% to a -6.0% underweight. The GIC modestly lowered its overweights to Asia, UK, Europe ex UK, and Global Healthcare stocks.
The U.S. economy grew by 2.0% in the third quarter as supply chain constraints weighed on goods consumption. Growth should rebound some with elevated levels of personal savings likely to support above-trend growth in 2022, but supply chain issues need to moderate. For the full year, Citi Global Wealth is expecting the economy to grow by 5.5% in 2021 and 3.5% in 2022. We expect inflationary pressures to ease in 2022 with inflation tracking closer to 2.5% to 3.0%.
Stocks (Overweight Large-Cap; Underweight SMID)
Citi’s Global Investment Committee (GIC) remains overweight on U.S. large-cap stocks, but maintains an underweight on small- and middle-cap (SMID) stocks. Strong earnings and more stable interest rates have helped U.S. stocks to reach new highs. While we do not envision a repeat of the gains experienced over the last 12 months, corporate earnings should rise further in the year ahead and support additional gains. The GIC continues to favor higher quality stocks like dividend growers and healthcare.
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 has remained fairly compressed with its yield fluctuating between and 1.50% and 1.70% in October. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.
Europe and Japan
Economy (Europe: Recovering / Japan: Recovering)
The euro area economy continues to recover steadily from the pandemic shock, but economic activity may be peaking. Higher energy prices and supply bottlenecks may result in downward revisions to 2022 GDP. Citi Global Wealth is forecasting growth in the European Union to fall from about 4.8% in 2021 to 3.9% in 2022. Despite supply chain problems, economic activity is likely to pick up in Japan during the current quarter. However, Citi Research’s economists still trimmed their growth forecasts slightly from 2.2% in 2021 and 3.7% in 2022 to 2.1% and 3.6%, respectively.
Stocks (UK: Overweight; Europe ex UK: Neutral; SMID: Neutral / Japan: Neutral)
The GIC maintains an overweight on UK equities, but has reduced its overweight to large-cap stocks slightly. The GIC is 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 cheap, and the FTSE 100 is largely comprised of value-oriented Energy and Financial names, which we think can recover further if rates rise further.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Citi Research’s growth forecast for emerging markets remains at 6.6% year-on-year in 2021 and at 4.6% year-on-year in 2022. However, concerns are rising that China’s economy could slow in coming quarters with growth expected to slip from 8.1% in 2021 to 4.9% in 2022.
Stocks (Overweight Asia ex-China and China; Neutral Latin America; Underweight EMEA)
The GIC is overweight on emerging market Asia ex China, but reduced its overweight a bit as a slowing in China may weigh on the region. We still think that China macro policies will help the region to recover in the back half of next year. Latin America remains at a neutral weighting.
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 Target||3,231||3,300||4,900 (YE 2022)|
|S&P 500 P/E Ratio||18.97x||27.43x||24.1x|
|S&P 500 EPS Growth||2.0%||-13.5%||43.1%|
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|
|Based on PPP Weights||-3.3||6.0||4.5||2.8||4.2||3.9||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||2016||2017||2018||2019||2020||MTD||QTD||YTD||Instrument||Current (%)|
|Global||1.06||3.3||2.1||0.5||7.1||5.7||-0.2||-0.2||-2.1||10-Yr. U.S. Treasury||1.55|
|U.S.||1.63||2.7||3.6||0.0||8.9||7.7||0.0||0.0||-1.6||30-Yr. U.S. Treasury||1.93|
|Europe||0.24||3.3||0.5||0.5||6.0||4.1||-0.6||-0.6||-2.9||1-Yr. CD Rate||0.28|
|EM Sovereign||4.84||9.6||9.8||-4.1||14.8||5.4||0.3||0.3||-2.3||30-Yr. Fixed Mortgage||3.14|
|U.S. High Yield||4.85||17.8||7.0||-2.1||14.1||6.3||-0.2||-0.2||4.4||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)