Monthly Market Snapshot: August 31, 2022
The global equity market stumbled in August as Fed Chair Powell’s Jackson Hole speech signaled to investors that it is too early for central banks to dial back on aggressive rate hikes. Combined with rising concerns about an energy crisis in Europe as Russian supplies are curtailed, the MSCI AC World Index, a broad measure of global stocks, dropped 3.9%. European stocks have materially underperformed – tumbling 6.5% in August and now down 27.6% year-to-date. In the United States, the S&P 500 retreated 4.2% while the tech- heavy NASDAQ slid 4.6% as Treasury yields once again surged. Global fixed income returns were negative as well with the FTSE World Broad Investment Grade Bond (USBIG) index falling 3.2%.
Citi Global Wealth Investments’ (GGWI) Global Investment Committee added to its global fixed income allocation by increasing its exposure to short-term U.S. Treasuries and short-term U.S. Investment Grade Corporate bonds. To fund this shift, the GIC eliminated its overweight to global natural resources. These changes reduced our global equity position from neutral to a slight underweight. The global fixed income position is now slightly overweight.
Economy (Possibly Headed Towards Contraction)
After two consecutive quarters of negative growth in the first half of 2022, the U.S. economy appears to be rebounding some with the Atlanta Fed’s GDPNow tracker estimating 2.6% growth in the third quarter. However, with the Federal Reserve aggressively tightening monetary policy to combat inflation, we expect the economy to slow to an annual pace of 0.7% in 2023. On the upside, headline inflation may have finally peaked in July. It is possible that the U.S. economy avoids a recession, but it may require the Federal Reserve to pause rate hikes around the turn of the year.
Stocks (Slightly Overweight Large-Cap; Underweight SMID)
CGWI’s Global Investment Committee (GIC) is maintaining a defensive tilt with a preference towards higher quality stocks like dividend-growers, healthcare, and consumer staples. The Committee unwound its thematic overweight in Global Natural Resources as we believe the sector may face downside risk should the U.S. economy enter a recession. We remain underweight small- and mid-cap stocks as the style factor tends to be more sensitive than large-cap stocks to economic downturns.
The GIC is solidly overweight intermediate- and long-duration U.S. Treasuries (such as the 30-year tenure). While still underweight short-term U.S. treasuries, we did reduce the underweight as we see the asset class becoming more attractive as yields rise sharply. We also remain overweight U.S. Treasury- Inflation-Protected Securities (TIPS) and like preferred stock as we lean into quality fixed income.
Europe and Japan
Economy (Europe: Possibly Headed Towards Contraction / Japan: Expanding)
The sharp rise in natural gas prices and electricity prices looks increasingly likely to trigger a recession within the region. CGWI is forecasting that growth could slip from 3.0% year-on-year in 2022 to minus 0.5% in 2023. The United Kingdom’s economy may contract by 1.0% in 2023. We expect Euro Area growth to rebound in 2024. In Japan, a slowing U.S. economy may weigh on the region’s exports. Citi Research’s economists see growth slowing from 1.2% in 2021 to 0.8% in 2022.
Stocks (Neutral UK; Underweight Europe ex UK; Underweight SMID / Underweight Japan)
The GIC maintains an underweight position on Europe ex UK and Switzerland that was put in place in early March. We expect growth to weaken materially as rising energy costs take their toll. Fiscal stimulus and price controls may be needed to reduce the burden on consumers. We also remain underweight on non-U.S. small- and mid-cap stocks (SMID) and Japanese stocks as the region grapples with a slowing in major trade partners (China and the United States).
The GIC maintains a deep underweight on both European and Japanese sovereign bonds.
Citi Research’s economists expect emerging market economies to slow from 6.8% year-on-year in 2021 to 3.6% year-on-year in 2022. Growth may rebound in 2023 if China’s stimulus takes, but China’s fragile property sector and youth unemployment bears watching. CGWI still believes that year-on-year growth in China will climb from 3.5% in 2022 to 4.5% in 2023.
Stocks (Overweight China; Neutral Asia ex China and Latin America; Underweight EMEA)
The GIC is overweight China stocks on hopes that improving supply chains and stimulus will help to turn the economy around. We are neutral on Emerging Market Asia ex China. We are also neutral on Latin America and underweight Emerging Europe, Middle East, and Africa (EMEA).
Bonds (Overweight Asia; Neutral EMEA and Latin America)
The GIC maintains an overweight on Emerging Market Asia fixed income. In local bonds, future returns may be driven by foreign exchange movements.
U.S. Stock Market and Economic Forecasts
|S&P 500 Estimate||3,756||4,766||4,200|
|S&P 500 P/E Ratio||27.43x||21.6x||17.2x|
|S&P 500 EPS Growth||-22.1%||70.1%||8.4%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||6.2||3.2||3.3||4.4||8.8||6.0||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||2017||2018||2019||2020||2021||MTD||QTD||YTD||Instrument||Current (%)|
|Global||3.20||2.1||0.5||7.1||5.7||-2.1||-3.2||-0.6||-10.9||10-Yr. U.S. Treasury||3.19|
|U.S.||3.96||3.6||0.0||8.9||7.7||-1.6||-2.7||-0.4||-10.9||30-Yr. U.S. Treasury||3.29|
|Europe||2.39||0.5||0.5||6.0||4.1||-2.9||-4.9||-0.9||-12.9||1-Yr. CD Rate||1.38|
|EM Sovereign||8.08||9.8||-4.1||14.8||5.4||-2.8||-0.6||2.4||-19.6||30-Yr. Fixed Mortgage||5.95|
|U.S. High Yield||8.54||7.0||-2.1||14.1||6.3||5.4||-2.3||3.6||-10.7||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)