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Monthly Market Snapshot: October 2019
Highlights
Stocks experienced a broad-based rally in October as geopolitical risks eased and recession fears ebbed. Although U.S. stocks experienced a strong month with the S&P 500 marching 2.0% higher, international markets performed even better with European shares jumping 3.3% and Japanese shares surging 4.8%. Emerging markets added 4.1%.
Fears of a U.S. recession have not completed faded, but recent economic data suggest that the U.S. economy may be starting to stabilize. An above consensus jobs report and solid consumer spending in the third quarter support the theory that the U.S. consumer remains the bulwark against a U.S. recession. Business investment is likely to remain weak, but investors should feel more confident about the state of the U.S. economy following October’s data releases.
Citi’s Private Bank’s Global Investment Committee (GIC) is maintaining a neutral position on global stocks, including U.S. large capitalization shares. Following a sharp rally in global bond yields, the Committee is maintaining a modest underweight on global fixed income as we see lower returns in the year ahead. Preferred asset classes include emerging Asian equities and short- and intermediate- duration U.S. Treasuries.
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Regional Outlook
United States
Economy (Slowing)
The U.S. economy expanded at an annualized rate of 1.9% in the third quarter of 2019. While weak business investment has been weighing on growth, consumer spending has held up quite well – advancing at an annualized rate of 2.9%. Recent manufacturing sector and employment data suggest that the U.S. economy may be settling in at a year-on-year growth rate of about 2.0%.
Stocks (Neutral)
Citi Private Bank’s Global Investment Committee is maintaining its neutral rating on large-cap U.S. stocks. Monetary policy and trade policy have moved in a much less troubling direction that is boosting equity prices. We think that stocks can likely move even higher from here, but would not be surprised to see market volatility once again rise. Citi’s GIC favors equities with consistent dividend growth.
Bonds (Overweight)
The Federal Reserve decided to cut interest rates for a third time in October and signaled that it may now enter into holding pattern while it assesses the impact of its recent moves. In the periods of 1995-1996 and 1998, the Fed also cut rates three times in order to stave off a potential economic slowdown and then paused. While maintaining an overweight on short- and intermediate-duration U.S. Treasuries, and intermediate-duration investment grade corporate bonds, we expect lower returns ahead.
Europe and Japan
Economy (Slowing)
Citi’s economists believe that euro area growth should bottom out in the second quarter of 2020 at a rate of about 0.8% year-on-year. While accommodative financial conditions should help, the lack of a meaningful fiscal response will likely keep inflation from returning back to target quickly. In terms of Japan, Citi’s economists are keeping their 2019 forecast unchanged at 1.0%, but have raised their 2020 forecast from an annual rate of just 0.1% to 0.3% as typhoon disaster relief may boost growth.
Stocks (Europe: Neutral / Japan: Neutral)
The GIC maintains a neutral stance on European (ex-UK) stocks. Brexit risks have receded some and the European Central Bank has renewed its bond purchasing program. However, U.S. and European Union trade tensions may still escalate if auto tariffs are not tabled. The Committee is also maintaining a neutral position on Japanese equities. While the country is moving towards more shareholder-friendly policies, the country just increased its consumption tax from 8% to 10% which may limit the upside in shares.
Bonds (Underweight)
In general, we still European and Japanese sovereign bond yields as unacceptable due to negative interest rates across several maturities.
Emerging Markets
Economy (Slowing)
Emerging market economies are expected to slow from 4.5% in 2018 to 4.0% in 2019. However, growth should rebound to 4.3% in 2020. In China, our economists are expecting growth for 2019 to ease to 6.2% (vs. 6.6% in 2018). In 2020, growth may ease even further to 5.8%. However, we should note that there are some initial signs that the declines in manufacturing activity may be starting to bottom.
Stocks (Neutral)
The GIC has lowered its stance on emerging market equities from a slight overweight to a neutral position. However, there are some regional differences. We are underweight the EMEA region while remaining overweight emerging Asia.
Bonds (Slightly Overweight)
We are overweight emerging market fixed income – specifically in emerging Asia and Latin America.
U.S. Stock Market and Economic Forecasts
| Indicator | 2018A | 2019F | 2020F |
|---|---|---|---|
| S&P 500 Target | 2,507 | 3,050 | 3,300 |
| S&P 500 P/E Ratio | 15.43x | 18.11x | 17.28x |
| S&P 500 EPS Growth | 22.5% | 2.0% | 4.8% |
| GDP | 2.9% | 2.3% | 2.0% |
| Inflation | 2.0% | 1.5% | 1.8% |
| Unemployment Rate | 3.9% | 3.7% | 3.5% |
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019F | 2020F | 2021F | 2019F | 2020F | 2021F | 2019F | 2020F | 2021F | 2019F | 2020F | 2021F | |
| Global | 2.7 | 2.7 | 2.8 | 2.4 | 2.5 | 2.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 3.2 | 3.4 | 3.7 | 3.1 | 3.2 | 3.2 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 1.7 | 1.5 | 1.6 | 1.3 | 1.5 | 1.7 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 2.3 | 2.0 | 1.8 | 1.5 | 1.8 | 2.0 | 1.75 | 1.25 | 1.25 | N/A | N/A | N/A |
| Euro Area | 1.1 | 1.0 | 1.5 | 1.2 | 1.2 | 1.5 | -0.29 | -0.36 | -0.06 | 1.11 | 1.11 | 1.19 |
| Japan | 1.0 | 0.3 | 0.5 | 0.5 | 0.8 | 0.8 | -0.15 | -0.06 | 0.15 | 108 | 103 | 94 |
| Emerging Markets | 4.0 | 4.3 | 4.4 | 3.9 | 3.8 | 3.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 6.2 | 5.8 | 5.6 | 2.7 | 2.4 | 2.0 | 3.01 | 2.95 | 2.95 | 6.98 | 7.21 | 6.63 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2014 | 2015 | 2016 | 2017 | 2018 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 534 | 2.1 | -4.3 | 5.6 | 21.6 | -11.2 | 2.6 | 2.6 | 17.3 | 18.7 | 16.8 | 2.5 |
| S&P 500 | 3038 | 11.4 | -0.7 | 9.5 | 19.4 | -6.2 | 2.0 | 2.0 | 21.2 | 20.3 | 18.7 | 1.9 |
| DJIA | 27046 | 7.5 | -2.2 | 13.4 | 25.1 | -5.6 | 0.5 | 0.5 | 15.9 | 18.8 | 18.5 | 2.2 |
| NASDAQ | 8292 | 13.4 | 5.7 | 7.5 | 28.2 | -3.9 | 3.7 | 3.7 | 25.0 | 33.0 | 25.2 | 1.0 |
| Europe | 3003 | 1.2 | 3.9 | 0.7 | 21.2 | -18.5 | 3.3 | 3.3 | 17.2 | 19.6 | 15.4 | 3.4 |
| Japan | 3353 | 7.1 | 9.1 | 0.4 | 21.8 | -14.5 | 4.8 | 4.8 | 14.2 | 14.5 | 14.0 | 2.3 |
| Emerging Markets | 1042 | -4.6 | -17.0 | 8.6 | 34.3 | -16.6 | 4.1 | 4.1 | 7.9 | 14.6 | 13.7 | 2.9 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2014 | 2015 | 2016 | 2017 | 2018 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.37 | 7.9 | 0.9 | 3.3 | 2.1 | 0.5 | -0.2 | -0.2 | 7.8 | 10-Yr. U.S. Treasury | 1.69 |
| U.S. | 2.32 | 5.9 | 0.5 | 2.7 | 3.6 | 0.0 | 0.3 | 0.3 | 9.0 | 30-Yr. U.S. Treasury | 2.18 |
| Europe | 0.12 | 11.2 | 1.1 | 3.3 | 0.5 | 0.5 | -0.9 | -0.9 | 7.5 | 1-Yr. CD Rate | 1.26 |
| EM Sovereign | 5.24 | 7.1 | 0.6 | 9.6 | 9.8 | -4.1 | 0.0 | 0.0 | 12.5 | 30-Yr. Fixed Mortgage | 3.75 |
| U.S. High Yield | 6.36 | 1.8 | -5.6 | 17.8 | 7.0 | -2.1 | 0.2 | 0.2 | 11.2 | Prime Rate | 4.75 |
Asset Class Returns (Sorted by Performance)
