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An Unsurprising
September Slump

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Monthly Market Snapshot: September 2021

Highlights

As expected, September was a rough months for stocks as investors digested early signs of monetary policy normalization, higher bond yields, and a heavy U.S. legislative agenda. On a global basis, stocks slid 4.3% in the month. In the U.S., the S&P 500 slipped 4.8%, but finished the third quarter with a 0.2% gain (its sixth consecutive quarter of gains). The NASDAQ, which is more sensitive to rising bond yields, fell by 5.3%. Japanese stocks outperformed – rising by 2.1%. The 10-year U.S. Treasury yield jumped 18 basis points from 1.31% to 1.49% by month-end as investors considered a tapering of Fed bond purchases and persistent inflation.

A confluence of events are causing investors to proceed cautiously. Changes appear to be coming on both the monetary policy (the Fed) and fiscal policy front (Congress). The Fed strongly signaled that it would announce a tapering in the pace of its bond purchases in November and Congress is juggling two major infrastructure bills while also trying to raise the debt ceiling.

Citi’s Global Investment Committee (GIC) maintains a 8% overweight in Global Equities with a concentration in Global Healthcare while Fixed Income and Cash is a 8% underweight. The GIC recommends holding 10% of medium-risk portfolios in stocks with consistent dividend growth.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

The pace of economic growth appears to be waning some with third quarter real GDP tracking at just 3.2% according to the Atlanta Fed. However, there are signs of a modest rebound building in September, which leaves Citi Research expecting 4.7% annualized growth in the quarter. Part of this slowdown likely reflects the resurgence of COVID, but some of it can also be attributed to supply-side constraints. For the full year, Citi Research is expecting the economy to grow by 5.8% in 2021 and 3.8% in 2022.

Stocks (Overweight Large-Cap; Underweight SMID)

Citi’s Global Investment Committee (GIC) remains overweight on U.S. large-cap stocks, but maintains an underweight on small- and middle-cap (SMID) stocks. A confluence of events in September (China real estate concerns, an aggressive U.S. legislative agenda, and a forthcoming tapering of the Fed’s bond purchases) has left investors cautious. As such, the GIC remains in a somewhat defensive position, favoring higher quality stocks like dividend growers and healthcare.

Bonds (Neutral)

The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, and overweight U.S. Treasury-Inflation-Protected Securities (TIPS). Despite a flurry of risks, the 10-year U.S. Treasury yield has remained remarkably stable in September – trading in a range of 1.28% to 1.37%. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.

Europe and Japan

Economy (Europe: Recovering / Japan: Recovering)

Continued progress on the vaccination front and ample monetary policy support suggests that real GDP could return to its pre-pandemic trend by the end of 2022. Citi Research expects real GDP to rise by 5.2% in 2021 – an upgrade of 0.6% from the prior month’s estimates. The forecast for 2022 has also been lifted – rising 0.2% to 4.7%. In Japan, growth forecasts may be impacted by who wins the 2021 Liberal Democratic Party (LDP) leadership election at the end of September. However, growth will likely accelerate in the fourth quarter with Citi Research looking for 5.0% annualized growth. For the full year, growth of 5.8% year-on-year is expected in 2021 and 3.8% growth is expected in 2022.

Stocks (Europe: Overweight; Neutral SMID / Japan: Neutral)

The GIC maintains an overweight on UK equities, but is neutral Europe ex UK. The GIC is also neutral on Japan large-caps. Non-U.S. small- and mid-cap stocks (SMID) are considered a neutral or slight underweight as well. In the UK, valuations remain cheap, and the FTSE 100 is largely comprised of value-oriented Energy and Financial names, which we think can recover further if rates eventually rise.

Bonds (Underweight)

The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.

Emerging Markets

Economy (Recovering)

Citi Research’s 2021 growth forecast for emerging markets has been reduced slightly to 6.6% year-on-year. This is slightly lower than the expectations for Asia, which is expected to grow 7.4% in 2021. However, concerns are rising that China’s economy could slow in coming quarters. Latin America is expected to grow by 6.3%% in 2021 and by 2.4% in 2022.

Stocks (Overweight Asia (ex China) and China; Neutral Latin America; Underweight EMEA)

The GIC is overweight on emerging market Asia as it recently upgraded its allocation to China as the deep correction has made valuations look attractive. More broadly, Asian economies are positioned well for an industrial rebound expected later this year. Latin America remains at a neutral weighting.

Bonds (Overweight Asia; Neutral EMEA and Latin America)

The GIC maintains an overweight on emerging market fixed income, specifically Asia. In local bonds, future returns may be driven by foreign exchange movements.

U.S. Stock Market and Economic Forecasts

Figure 1: U.S. Stock Market and Economic Forecasts

Indicator	2019A	2020A	2021F
S&P 500 Target	3,231	3,300	4,000
S&P 500 P/E Ratio	18.97x	27.43x	24.4x
S&P 500 EPS Growth	2.0%	-13.5%	39.1%
GDP (YoY)	2.2%	-3.4%	5.8%
Inflation (YoY)	1.5%	1.2%	3.6%
Unemployment Rate	3.7%	8.1%	5.3%

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 September 30, 2021. Note 1: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. Note 2: “A” means actual; “F” means forecast. 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
	2020A	2021F	2022F	2020A	2021F	2022F	2020A	2021F	2022F	2020A	2021F	2022F
Global	-3.5	5.8	4.4	2.0	3.2	3.0	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	-3.3	6.0	4.6	2.8	4.2	3.6	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	-4.9	5.1	4.0	0.7	2.6	2.4	N/A	N/A	N/A	N/A	N/A	N/A
United States	-3.4	5.8	3.8	1.2	3.6	2.7	0.91	2.00	2.00	N/A	N/A	N/A
Japan	-4.6	2.2	3.7	0.0	-0.2	0.7	0.03	0.06	0.15	107	110	112
Euro Area	-6.5	5.2	4.7	0.3	2.3	2.3	-0.52	-0.24	-0.11	1.14	1.18	1.16
Emerging Markets	-1.7	6.6	4.9	3.6	3.9	3.8	N/A	N/A	N/A	N/A	N/A	N/A
China	2.3	8.2	5.5	2.5	1.2	2.2	2.96	3.04	2.85	6.90	6.45	6.18

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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	2016	2017	2018	2019	2020	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	710	5.6	21.6	-11.2	41.8	14.3	-4.3	-1.5	9.8	22.1	18.4	1.8
S&P 500	4308	9.5	19.4	-6.2	49.8	16.3	-4.8	0.2	14.7	25.9	21.4	1.4
DJIA	33844	13.4	25.1	-5.6	31.2	7.2	-4.3	-1.9	10.6	20.5	18.5	1.8
NASDAQ	14449	7.5	28.2	-3.9	94.2	43.6	-5.3	-0.4	12.1	122.8	31.9	0.7
Europe	3504	0.7	21.2	-18.5	26.7	3.4	-5.3	-2.7	7.9	21.0	16.2	2.3
Japan	4016	0.4	21.8	-14.5	31.3	12.2	2.1	3.8	4.2	16.9	15.5	1.9
Emerging Markets	1253	8.6	34.3	-16.6	33.7	15.8	-4.2	-8.8	-3.0	15.5	13.2	2.4

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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	2016	2017	2018	2019	2020	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
Global	0.89	3.3	2.1	0.5	7.1	5.7	-1.0	-0.1	-1.9	10-Yr. U.S. Treasury	1.49
U.S.	1.47	2.7	3.6	0.0	8.9	7.7	-0.9	0.0	-1.6	30-Yr. U.S. Treasury	2.04
Europe	0.07	3.3	0.5	0.5	6.0	4.1	-1.1	0.0	-2.3	1-Yr. CD Rate	0.29
EM Sovereign	4.63	9.6	9.8	-4.1	14.8	5.4	-2.6	-1.0	-2.6	30-Yr. Fixed Mortgage	3.18
U.S. High Yield	4.69	17.8	7.0	-2.1	14.1	6.3	0.1	0.9	4.6	Prime Rate	3.25

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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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2021 Mid-Year Outlook on U.S. Markets (64:00)