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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.
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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
| 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% |
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 |
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 | 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 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2014 | 2015 | 2016 | 2017 | 2018 | MTD | QTD | YTD | Instrument | Current (%) |
| 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 |
Asset Class Returns (Sorted by Performance)
