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Monthly Market Snapshot: August 2019
Highlights
Stocks fell across most regions in August as investors grew increasingly anxious over slowing global growth and the ongoing U.S. – China trade war. In the United States, the S&P 500 was at one point 4.7% lower in the month, but it rallied back to close the month at just 1.8% lower (year-to-date gains are still 16.7%). In Europe, worries about Germany’s economy and concerns about the upcoming October 31 Brexit deadline led to a 2.2% decline in equities. Emerging markets continued to underperform – falling by 5.1%.
An inverted yield curve (when the two-year U.S. Treasury yield is higher than the 10-year U.S. Treasury yield) is one of the best indicators of an oncoming U.S. recession. However, the timing of the next recession can vary widely. While the odds of a recession are rising, one does not yet appear imminent. There may still be time for policymakers to make decisions that can help to avoid (or delay) a U.S. recession.
Citi’s Private Bank’s Global Investment Committee (GIC) maintains a slight underweight on global stocks. After a sharp drop in international bond yields, the GIC decided to reduce its global fixed income overweight of 1.5% to neutral. Those proceeds were used to initiate a 1.5% overweight on gold.
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Regional Outlook
United States
Economy (Slowing)
With the U.S. manufacturing sector looking like it may be in recession, the outlook for growth is becoming increasingly dependent on the U.S. consumer. Fortunately, the consumer remains strong with real consumer spending climbing by 4.7% in the second quarter. Overall, some leading economic indicators are signaling caution, but a U.S. recession does not yet appear imminent.
Stocks (Underweight)
Citi Private Bank’s Global Investment Committee remains underweight U.S. large-cap stocks. We think that stocks can move higher in the face of growth concerns, but the lack of clarity on trade policy is keeping us cautious. A more definitive path forward from both the Fed and the U.S. Administration may be needed to move noticeably higher from here. Citi’s mid-year 2020 S&P 500 target remains 3,000.
Bonds (Overweight)
Another rate cut from the Fed is widely expected, but the extent of easing remains a bit of a mystery. Will the July rate cut prove to be a “mid-cycle adjustment” meant to simply unwind the December rate hike or does it mark the start of a new easing cycle? For now, the GIC remains overweight cash, short-, intermediate-, and long-duration U.S. Treasuries as most yields are still gliding lower.
Europe and Japan
Economy (Slowing)
Germany’s economy shrank during the April-to-June period of this year – receding by 0.1% from the previous quarter. If the slowdown deepens further, we think that the odds of European officials moving towards either fiscal or monetary stimulus will rise. At this stage, Citi’s economists are maintaining their GDP forecasts for the region – expecting growth of 1.0% and 1.2% in 2019 and 2020, respectively. In Japan, economic activity appears to be picking up a bit with Citi’s proprietary economic surprise index showing a noticeable turnaround in data since June. This is consistent with Citi’s economists’ decision in July to lift their forecasts for 2019 growth by 0.2% to 0.8%.
Stocks (Europe: Neutral / Japan: Slight Underweight)
The GIC maintains a neutral stance on European (ex-UK) stocks. Even though valuations look reasonable when compared to U.S. equities, European exporters appear 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)
A renewal of stimulus measures in Europe may be forthcoming with the European Central Bank widely expected to cut interest rates at their September 12 meeting. However, we still see the yields on most European and Japanese sovereign bonds as unacceptable.
Emerging Markets
Economy (Slowing)
Emerging market economies are expected to slow from 4.5% in 2018 to 4.2% in 2019. Renewed trade tensions are still weighing on emerging market economic prospects. While some regions (Vietnam, Korea and Taiwan) may benefit from a shift in supply chains, the further ratcheting up of tariffs on Chinese goods is likely adding to instability as China’s economy continues to slow.
Stocks (Slight Overweight)
The GIC remains slightly overweight emerging market equities (particularly South Asia). However, we see this overweight as a longer-term investment decision. In the near-term, renewed U.S. – China trade tensions, a stronger U.S. dollar, and geopolitics may continue to dampen returns. 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 | 17.60x | 16.78x |
| S&P 500 EPS Growth | 22.5% | 2.0% | 4.8% |
| 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 | 511 | 2.1 | -4.3 | 5.6 | 21.6 | -11.2 | -2.6 | -2.4 | 12.1 | 17.4 | 15.8 | 2.6 |
| S&P 500 | 2980 | 11.4 | -0.7 | 9.5 | 19.4 | -6.2 | -1.8 | -0.5 | 16.7 | 19.0 | 17.5 | 2.0 |
| DJIA | 26864 | 7.5 | -2.2 | 13.4 | 25.1 | -5.6 | -1.7 | -0.7 | 13.2 | 17.4 | 17.1 | 2.3 |
| NASDAQ | 8175 | 13.4 | 5.7 | 7.5 | 28.2 | -3.9 | -2.6 | -0.5 | 20.0 | 30.7 | 23.8 | 1.1 |
| Europe | 2883 | 1.2 | 3.9 | 0.7 | 21.2 | -18.5 | -2.2 | -4.6 | 10.0 | 17.4 | 14.1 | 3.6 |
| Japan | 3132 | 7.1 | 9.1 | 0.4 | 21.8 | -14.5 | -1.0 | -0.9 | 5.6 | 13.2 | 12.5 | 2.6 |
| Emerging Markets | 1037 | -4.6 | -17.0 | 8.6 | 34.3 | -16.6 | -5.1 | -6.7 | 1.9 | 13.2 | 12.9 | 3.0 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2014 | 2015 | 2016 | 2017 | 2018 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.18 | 7.9 | 0.9 | 3.3 | 2.1 | 0.5 | 2.3 | 3.1 | 8.7 | 10-Yr. U.S. Treasury | 1.50 |
| U.S. | 2.15 | 5.9 | 0.5 | 2.7 | 3.6 | 0.0 | 2.7 | 2.9 | 9.3 | 30-Yr. U.S. Treasury | 1.50 |
| Europe | -0.11 | 11.2 | 1.1 | 3.3 | 0.5 | 0.5 | 2.0 | 3.5 | 9.1 | 1-Yr. CD Rate | 1.96 |
| EM Sovereign | 5.05 | 7.1 | 0.6 | 9.6 | 9.8 | -4.1 | -0.3 | 1.4 | 12.5 | 30-Yr. Fixed Mortgage | 3.69 |
| U.S. High Yield | 6.41 | 1.8 | -5.6 | 17.8 | 7.0 | -2.1 | 0.3 | 0.7 | 10.7 | Prime Rate | 5.25 |
Asset Class Returns (Sorted by Performance)
