Monthly Market Snapshot: April 2021
Technology stocks recovered as long-duration interest rates stabilized. In the United States, the NASDAQ surged 5.4% as the 10-year U.S. Treasury yield fell from 1.74% at the end of March to 1.63% at the end of April. The S&P 500 jumped 5.2% while the Dow Jones rose 2.7%. Japanese shares underperformed as the region implemented COVID restrictions once again. Emerging markets added 2.4% in the month. Fixed income returns improved, but remain largely negative year-to-date.
U.S. economic data have been coming in very strong with the economy growing by an annualized rate of 6.4% in the first quarter of 2021 and the labor market adding 916,000 jobs in March. However, total employment remains over 8 million jobs lower than it was in February 2020. This should leave monetary policy very accommodative for some time. Fiscal policy also remains supportive with an infrastructure plan likely to be passed. Though such a plan will likely include some tax increases for wealthy individuals and corporations.
Citi’s Global Investment Committee decided to reduce its global equity allocation from a +10% weighting to a +8% weighting. Fixed income was raised from -9% to -7%. Within equities, the GIC reduced its overweight in global small- and mid-cap shares and large-cap developed equities, including the U.S.
The U.S. grew by annualized rate of 6.4% in the first quarter of 2021 and is on track to expand in the second quarter as well. The level of real GDP remains slightly below where it was in the fourth quarter of 2020, but the nominal GDP level has fully recovered. The labor market has been recovering at a rapid clip as well, but employment remains about 8 million jobs below its level in February 2020. The Biden Administration has proposed two separate plans that will provide additional fiscal stimulus spread out over a period of 10 years. The cost of these plans will be offset by higher taxes over a period of 15 years.
Stocks (Neutral Large-Cap; Underweight SMID)
Citi’s Global Investment Committee maintains a neutral position on U.S. stocks, but lowered its allocation to large-cap stocks in a step towards de-risking. Small- and middle-cap (SMID) stocks are an underweight in the portfolio. While markets appear richly valued, this is largely a function of the powerful rally seen in pockets of growth and momentum-related shares. We prefer value and cyclically-oriented names over the next few quarters.
The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, and overweight U.S. Treasury-Inflation-Protected Securities (TIPS). Large scale fiscal packages have temporarily put a floor in long-dated yields, while short-term rates have diminished appeal given the expectation of higher inflation. We expect a range of 1.50%-2.00% in 2021 for the 10-year U.S. Treasury yield, but see it trending toward 2.50% in future expansion years. For taxable US investors, muni yields are attractive relative to other taxable high-quality bonds.
Europe and Japan
Economy (Europe: Contracting / Japan: Contracting)
Citi’s economists expect a negative real GDP print for the Euro Area in the first quarter. Vaccinations should allow for robust activity in the second quarter, but data may be weak in April as extended restrictions continue to weigh on activity. As a result, the 2021 GDP forecast has been revised lower by 0.6% to 3.4%. In Japan, Citi’s economists revised down their 2021 forecast by 0.3% to 1.6% to reflect a supply chain shock and prolonged COVID restrictions.
Stocks (Europe: Overweight; Neutral SMID / Japan: Neutral; Neutral SMID)
The GIC maintains an overweight on Europe, particularly UK equities, but has lowered its weighting to Japan large-caps. Non-U.S. small- and mid-cap stocks (SMID) are considered a neutral or slight underweight. In the UK, the end of a long period of Brexit uncertainty is raising confidence in an independent Great Britain and valuations remain cheap. An improved COVID response may be the first indicator of economic recovery.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Citi expects emerging market economies to rebound from a -1.7% decline to 6.6% growth in 2021. The Asian region is expected to grow by 7.9% in 2021 while Latin America is expected to grow by 4.7%.
Stocks (Overweight Asia and Latin America; Neutral China and EMEA)
The GIC is overweight emerging markets (Asia ex China and Latin America), but China remains a neutral weighting. Regions like Latin America should recover as vaccines start to reach emerging markets. The longer-term outlook looks more cautious.
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||3,800|
|S&P 500 P/E Ratio||18.97x||27.43x||24.34x|
|S&P 500 EPS Growth||2.0%||-13.3%||21.2%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||-3.3||6.1||4.2||2.8||3.7||3.2||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||0.90||3.3||2.1||0.5||7.1||5.7||0.2||0.2||-2.6||10-Yr. U.S. Treasury||1.63|
|U.S.||1.49||2.7||3.6||0.0||8.9||7.7||0.9||0.9||-2.6||30-Yr. U.S. Treasury||2.30|
|Europe||0.11||3.3||0.5||0.5||6.0||4.1||-0.7||-0.7||-2.6||1-Yr. CD Rate||0.32|
|EM Sovereign||4.61||9.6||9.8||-4.1||14.8||5.4||2.4||2.4||-3.7||30-Yr. Fixed Mortgage||3.11|
|U.S. High Yield||4.80||17.8||7.0||-2.1||14.1||6.3||1.1||1.1||2.0||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)