A Rock'n October

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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.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

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

Figure 1: 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%

This table shows Citi's U.S. stock market and economic forecasts. Indicators include year-end targets for the S&P 500, Price-to-Earnings ratios, Earnings-Per-Share growth rates, gross domestic product, inflation, and the unemployment rate.

Sources: Citi Research and Citi Personal Wealth Management as of October 31, 2019. 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.

Global Economic Forecasts

Figure 2: 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

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This table shows Citi's forecasts for gross domestic product, consumer prices, 10-year sovereign bond yields, and exchange rates versus the U.S. dollar across various regions.

Market Indicators

Figure 3: Equity Markets

Equities	Level	2014	2015	2016	2017	2018	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
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

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This table shows returns for various equity markets, including returns from the previous 5 years and current year period-to-date returns. It also shows current valuations for these markets.

Note: Global = MSCI All Country World Index (USD); Europe = Euro Stoxx 50 Price Index (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). Most equity index returns shown here are based on a U.S. dollar basis. International returns for a U.S.-based investor can differ significantly depending on the effects of foreign currency exchange.

Figure 4: Fixed Income Markets

Fixed Income	YTM	2014	2015	2016	2017	2018	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
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

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This table shows returns for various fixed income markets. It also includes other key rates like the 10-year U.S. Treasury, 30-year U.S. Treasury, 1-year CD rate, and 30-year fixed mortgage rate.

Note: Global = Citi World BIG Index (LCL); U.S. = Citi U.S. Broad Investment Grade Bond Index (USD); Europe = Citi Euro Broad Investment Grade Index (EUR); EM Sovereign = Citi Emerging Markets Government Bond Index (USD); and U.S. High Yield = Citi High-Yield Market Index (USD).

Asset Class Returns (Sorted by Performance)

Figure 5: ... — Figure 5: Global Asset Class Returns (Year-to-Date)

Figure 6: ... — Figure 6: S&P 500 Sector Total Returns (Year-to-Date)

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Highlights

Regional Outlook

U.S. Stock Market and Economic Forecasts

Global Economic Forecasts

Market Indicators

Asset Class Returns (Sorted by Performance)

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