An Anxious August

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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.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

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

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	17.60x	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%

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 August 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	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

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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	1.18	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

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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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