Monthly Market Snapshot: April 30, 2022
April was a rough month for investors. Investors appear increasingly worried that the U.S. economy may be headed towards an environment of stubbornly high inflation and low economic growth. Our base case remains that the U.S. economy will avoid a “hard landing,” but we may need to see a cooling of inflation data and a stabilizing in bond yields before investor sentiment begins to improve. In the month of April, global equities tumbled with the MSCI AC World Index off 8.1%. Technology shares, which have been extremely sensitive to raising rates, plunged with the NASDAQ shedding 13.3% as the real 10-year U.S. Treasury yield leapt into positive territory. The bond market also experienced broad losses with the Citi’s World Broad Investment Grade Index falling 3.3%.
Our global equity overweight is largely in commodity hedges like natural resources, oil field services, and other defensive equities. Away from commodities, Citi Global Wealth Investments’ (CGWI) Global Investment Committee prefers companies with a solid track record of earnings and dividend growth (like consumer staples). We also believe that investors may wish to consider adding long-duration Treasuries (such as the 30-year U.S. Treasury) with yields likely to peak in 2022. We think that this type of defensive portfolio tilt has potential in the current environment.
The U.S. economy is in a period of transitions. The labor market remains tight with job growth holding steady, but growth is decelerating from a robust pace of about 5.5% year-on-year in 2021 to perhaps 1.9% in 2022. This transition is likely to bumpy and could result in a growth scare with the Federal Reserve also looking to tamp down inflation. Leading economic indicators have been cooling off with financial conditions weakening but are far from suggesting an imminent recession. This should enable the Federal Reserve to raise rates by 50-basis-points at least one more time and then they may reassess depending on incoming economic data.
Stocks (Slightly Overweight Large-Cap; Underweight SMID)
CGWI’s Global Investment Committee (GIC) is maintaining a defensive tilt with a preference towards higher quality stocks like dividend growers, healthcare, and consumer staples. The Committee also holds a thematic overweight in natural resources and oil field services which may benefit from the conflict between Russia and Ukraine. The Committee is underweight small- and middle-cap (SMID) stocks.
The GIC is underweight short-term U.S. Treasuries but overweight intermediate- and long-duration U.S. Treasuries. The Committee recently added exposure to the 30-year Treasury as we believe that yields are likely to peak in 2022 and may serve as a hedge should the drawdown in global equities worsen. We also remain overweight U.S. Treasury-Inflation-Protected Securities (TIPS).
Europe and Japan
Economy (Europe: Possibly Headed Towards Contraction / Japan: Expanding)
Eurozone growth will likely be challenged as the conflict between Russia and Ukraine has increased energy costs for the region. Thus far, business surveys have shown some resilience, but consumer confidence has weakened as consumers face inflationary pressures. Citi Global Wealth Investments (CGWI) is forecasting that growth could slip from 4.8% year-on-year in 2021 to 2.3% in 2022. Economic headwinds in Europe and Russia could also dampen growth in Japan. As such, Citi Research’s economists have revised down their 2022 real GDP forecast slightly from 2.1% to 2.0%.
Stocks (Neutral UK; Underweight Europe ex UK; Underweight SMID / Underweight Japan)
The GIC moved to an underweight position on Europe ex UK and Switzerland in early March. The Committee also brought down its allocation to UK equities to a neutral. We remain underweight on non-U.S. small- and mid-cap stocks (SMID). We also downgraded Japanese stocks to underweight.
The GIC maintains a deep underweight on both European and Japanese sovereign bonds.
Citi Research’s economists expect emerging market economies to slow from 6.7% year-on-year in 2021 to 3.8% year-on-year in 2022. Citi Research expects Russia’s economy to possibly contract by 9.6% in 2022 as sanctions take their toll. The second quarter will likely show a very deep contraction. The path for China’s economy will depend on significant stimulus but CGWI expects year-on-year growth to slow from 8.0% in 2021 to about 4.0% in 2022.
Stocks (Overweight China; Neutral Asia ex China and Latin America; Underweight EMEA)
The GIC remains overweight China but is neutral on Emerging Market Asia ex China. China’s macroeconomic policies are easing, and the region is somewhat insulated from rising geopolitical tensions. This could serve as a tailwind for the region’s equity markets. We are neutral on Latin America and underweight Emerging Europe, Middle East, and Africa (EMEA).
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 Estimate||3,756||4,766||4,700|
|S&P 500 P/E Ratio||27.43x||21.6x||18.9x|
|S&P 500 EPS Growth||-22.1%||70.1%||8.4%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||6.1||3.5||3.5||4.4||6.8||4.6||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||2017||2018||2019||2020||2021||MTD||QTD||YTD||Instrument||Current (%)|
|Global||2.57||2.1||0.5||7.1||5.7||-2.1||-3.3||-3.3||-8.5||10-Yr. U.S. Treasury||2.93|
|U.S.||3.47||3.6||0.0||8.9||7.7||-1.6||-3.8||-3.8||-9.6||30-Yr. U.S. Treasury||3.00|
|Europe||1.48||0.5||0.5||6.0||4.1||-2.9||-3.5||-3.5||-8.6||1-Yr. CD Rate||0.51|
|EM Sovereign||7.27||9.8||-4.1||14.8||5.4||-2.8||-5.7||-5.7||-15.5||30-Yr. Fixed Mortgage||5.42|
|U.S. High Yield||7.06||7.0||-2.1||14.1||6.3||5.4||-3.5||-3.5||-7.7||Prime Rate||3.50|
Asset Class Returns (Sorted by Performance)