Monthly Market Snapshot: September 2021
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.
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.
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.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
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
|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%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|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|
|Equity Returns (%)||Valuations||Div. Yld. (%)|
|Fixed Income Returns (%)||Other Key Rates|
|Fixed Income||YTM||2016||2017||2018||2019||2020||MTD||QTD||YTD||Instrument||Current (%)|
|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|
Asset Class Returns (Sorted by Performance)