Adjusting in July

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Monthly Market Snapshot: July 2019

Highlights

Globally, stocks inched higher in July as central banks moved towards easier monetary policy. In the United States, the S&P 500 rallied an additional 1.3% during the month – bringing the gains since the start of June up to 8.3%. In Europe, equities fell by 2.4% as Boris Johnson became the Prime Minister of the United Kingdom (increasing the odds of a “no-deal” Brexit). Emerging markets underperformed.

The Federal Reserve decided to cut interest rates by 0.25% at its July 31, 2019 meeting. Chairman Powell emphasized that the cut should be viewed as a “mid-cycle adjustment” rather than the start of a full cutting cycle. Citi’s economists are looking for one additional rate cut in September. Apart from the Federal Reserve, updates on the trade front are once again likely to retake the center stage.

Citi’s Private Bank’s Global Investment Committee (GIC) maintains a slight underweight on global stocks. The GIC’s global stock allocation is 2.0% underweight, global fixed income is 1.5% overweight and cash is 0.5% overweight.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Slowing)

The U.S. economy grew at an annualized pace of 2.1% in the second quarter – modestly slower than the 3.1% logged in the first quarter. However, we would advise against reading too much into the headline numbers as the underlying drivers of growth were much healthier in the second quarter with consumer spending rebounding noticeably. While there are some leading indicators that are signaling signs of caution, a U.S. recession still does not appear imminent.

Stocks (Underweight)

Citi Private Bank’s Global Investment Committee remains underweight U.S. large-cap stocks. Trade tensions appear to be resurfacing with the U.S. Administration threatening to implement a 10% tariff on $300 billion of Chinese goods as early as September 1. While the Federal Reserve decided to cut interest rates at their July meeting, it may not be the best policy option to offset trade uncertainties. The dampening of U.S. business investment is most likely a result of increased uncertainty, not tight financial conditions. A lower fed funds rate may not provide much help when it comes to adjusting supply chains.

Bonds (Overweight)

The Federal Reserve does not appear to be embarking on a new easing cycle, but additional rate cuts remain possible. With central banks moving towards easier monetary policy, the upside to rates might be limited. The GIC remains overweight cash, short-, intermediate-, and long-duration U.S. Treasuries.

Europe and Japan

Economy (Slowing)

Disappointing GDP growth will likely reinforce the European Central Bank’s desire to act soon. Most likely at the September 12 meeting. With the soft patch in the region proving to be persistent, Citi’s economists decided to lower their GDP forecasts for both 2019 and 2020 by 0.1% to 1.0% and 1.2%, respectively. On the flipside, Citi’s economists raised their forecasts for Japan – lifting their 2019 growth forecast by 0.2% to 0.8%. The outlook for 2020 depends on whether or not Prime Minister Abe decides to implement a consumption tax hike in October. Currently, Citi is looking for just 0.1% growth in 2020.

Stocks (Europe: Neutral / Japan: Slight Underweight)

The GIC maintains a neutral stance on European (ex-UK) stocks. Even though valuations look reasonable, European exporters may be exposed to the ongoing trade tensions and Brexit remains a viable risk in the second half of this year. In Japan, there may be opportunities in certain sectors like robotics and automation, but selectivity is key.

Bonds (Underweight)

We still see the yields on most European and Japanese sovereign bonds as unacceptable. There appears to be better opportunities elsewhere.

Emerging Markets

Economy (Slowing)

Emerging market economies are expected to slow from 4.5% in 2018 to 4.2% in 2019. Monetary policy easing may support near-term recovery prospects, but the specter of renewed trade tensions is still lingering. While some regions (Vietnam, Korea and Taiwan) may benefit from a shift in supply chains, a further ratcheting up of tariffs on Chinese goods could add to instability.

Stocks (Slight Overweight)

Despite rising trade uncertainties, the GIC remains overweight emerging market equities. While growth might be challenged over the near-term, long-term growth prospects and valuations appear much better than in developed markets. We believe investors should focus on long-term trends like healthcare.

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	2,850	Mid-Year: 3,000
S&P 500 P/E Ratio	15.43x	17.67x	16.83x
S&P 500 EPS Growth	22.5%	4.4%	5.0%
GDP	2.9%	2.6%	2.0%
Inflation	2.0%	1.7%	1.9%
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 July 31, 2019. Note: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. 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	2.8	2.8	2.9	2.5	2.5	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	3.3	3.5	3.8	3.1	3.1	3.1	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	1.8	1.5	1.6	1.4	1.6	1.7	N/A	N/A	N/A	N/A	N/A	N/A
United States	2.6	2.0	1.8	1.7	1.9	2.0	2.15	2.15	2.15	N/A	N/A	N/A
Euro Area	1.0	1.2	1.6	1.3	1.4	1.6	-0.04	0.23	0.72	1.13	1.20	1.30
Japan	0.8	0.1	0.5	0.5	0.6	0.8	-0.10	0.13	0.20	108	101	93
Emerging Markets	4.2	4.5	4.6	3.8	3.6	3.4	N/A	N/A	N/A	N/A	N/A	N/A
China	6.3	6.0	5.8	2.4	2.0	2.0	3.00	2.95	2.95	6.84	6.70	6.27

❮ Swipe left for more

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	524	2.1	-4.3	5.6	21.6	-11.2	0.2	0.2	15.1	17.7	16.0	2.5
S&P 500	2980	11.4	-0.7	9.5	19.4	-6.2	1.3	1.3	18.9	19.5	18.2	1.9
DJIA	26864	7.5	-2.2	13.4	25.1	-5.6	1.0	1.0	15.2	17.8	17.5	2.2
NASDAQ	8175	13.4	5.7	7.5	28.2	-3.9	2.1	2.1	23.2	32.4	24.6	1.0
Europe	2883	1.2	3.9	0.7	21.2	-18.5	-2.4	-2.4	12.5	17.8	14.4	3.6
Japan	3132	7.1	9.1	0.4	21.8	-14.5	0.1	0.1	6.7	13.7	12.8	2.5
Emerging Markets	1037	-4.6	-17.0	8.6	34.3	-16.6	-1.7	-1.7	7.4	13.9	12.8	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	1.49	7.9	0.9	3.3	2.1	0.5	0.7	0.7	6.2	10-Yr. U.S. Treasury	2.01
U.S.	2.56	5.9	0.5	2.7	3.6	0.0	0.3	0.3	6.4	30-Yr. U.S. Treasury	2.52
Europe	0.12	11.2	1.1	3.3	0.5	0.5	1.5	1.5	7.0	1-Yr. CD Rate	1.44
EM Sovereign	4.86	7.1	0.6	9.6	9.8	-4.1	1.7	1.7	12.9	30-Yr. Fixed Mortgage	3.87
U.S. High Yield	6.53	1.8	-5.6	17.8	7.0	-2.1	0.4	0.4	10.4	Prime Rate	5.50

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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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