Continued Ascent in August

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Monthly Market Snapshot: August 2020

Highlights

Stocks across most markets experienced impressive gains in August with the MSCI All Country World Index surging 6.0%. In the United States, the S&P 500 powered forward with a 7.0% gain and the tech-heavy NASDAQ climbed another 9.6%. Emerging markets underperformed, but still returned 2.1%. The 10-year U.S. Treasury yield jumped 18 basis points to 0.71%.

Worries that a surge of COVID-19 cases in July would cause the economic recovery to stall seem to have been misplaced. U.S. economic data have continued to surprise to the upside with third quarter U.S. real gross domestic product (GDP) tracking at just under 30% annualized. Combined with better-than-expected corporate earnings and an extremely supportive Federal Reserve, U.S. stocks seemed to be desensitized to risk. However, recent market action suggests that investors may be trimming positions in high-flying sectors.

Citi Private Bank’s Global Investment Committee (GIC) raised its global equity overweight by increasing its allocation to non-U.S. equities, particularly Europe and global small- and mid-capitalization shares. To fund the increase, the GIC reduced short and intermediate duration U.S. Treasuries from an overweight to neutral and slightly reduced its exposure to U.S. equities.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

The U.S. economy continues to recover. Incoming economic data point towards a strong rebound in the third quarter with growth tracking just shy of 30% annualized. Although growth will likely slow some in the fourth quarter as the initial reopening rebound fades. The unemployment rate should continue to trend lower over time as businesses recover from the COVID-19 pandemic; however, some temporary layoffs will likely become permanent. Growth should be above trend in 2021.

Stocks (Neutral; Overweight SMID)

Citi Private Bank’s Global Investment Committee slightly reduced its position in U.S. large-cap stocks, but remains overweight U.S. small- and mid-cap shares (SMID). Small-cap shares have rallied sharply, but remain below previous highs. Over the 12 to 18 month time horizon, we expect cyclical industries like industrials to recover further. In August, investors showed interest in cruise lines, air lines, and other travel-related stocks as vaccine developments and a decline in COVID cases increased optimism.

Bonds (Overweight)

The Federal Reserve is not expected to raise rates for a long time, which should keep rates “lower for longer.” With yields already quite low, Citi’s GIC decided to shift from an overweight on short- and intermediate-duration Treasuries to neutral. The Committee remains overweight investment grade corporate bonds and U.S. residential REITS and commercial mortgage REITS.

Europe and Japan

Economy (Europe: Recovering / Japan: Recovering)

Citi’s economists left their 2020 Euro Area growth forecast unchanged at -6.7%. With only a few restrictions left in place following the lockdown, the region should see a strong rebound in the second half of 2020. Citi’s growth forecast for 2021 is 6.5%. In Japan, growth looks like it may fall by -5.2% in 2020 before rebounding by 2.5% in 2021.

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

The GIC is neutral on both Europe and Japan large-caps, but overweight SMID. Over the next year or two, we expect global SMID to catch up in performance to U.S. large-cap shares. In general, SMID seems more favorably positioned across the world coming out of this crisis.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

The economic outlook for emerging markets looks better than many industrial economies with 2020 growth likely to fall -1.5% (versus -5.1% for industrial countries). However, Citi’s economists revised down their growth forecasts for China – from 6.2% to 5.9% in the second half. While the trade outlook may improve as the world exits lockdown, consumer spending may be held back due to an uncertain future.

Stocks (Overweight)

The GIC is overweight emerging markets (Asia and Latin America). Chinese shares, particularly those in the technology and internet sector, have risen sharply in recent months. While we may see some consolidation near-term after such a sharp rally, we remain long term optimistic on Asian consumption, technology and healthcare themes. Latin America could perform well coming out of this crisis. However, we maintain a cautious stance longer-term. We see it as a recovery trade.

Bonds (Overweight)

We are overweight emerging market fixed income as U.S. dollar-denominated debt valuations reflect poor fundamentals, but also long-term opportunities and attractive risk adjusted returns.

U.S. Stock Market and Economic Forecasts

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

Indicator	2018A	2019A	2020F
S&P 500 Target	2,507	3,231	3,300
S&P 500 P/E Ratio	15.43x	18.97x	26.50x
S&P 500 EPS Growth	22.5%	2.0%	-20.1%
GDP (YoY)	2.9%	2.3%	-3.3%
Inflation (YoY)	2.0%	1.4%	1.0%
Unemployment Rate	3.9%	3.7%	8.2%

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, 2020. 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
	2019F	2020F	2021F	2019F	2020F	2021F	2019F	2020F	2021F	2019F	2020F	2021F
Global	2.6	-3.7	5.6	2.4	1.9	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	3.0	-3.3	5.9	3.2	2.7	3.2	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	1.7	-5.1	4.9	1.3	0.6	1.5	N/A	N/A	N/A	N/A	N/A	N/A
United States	2.3	-3.3	4.4	1.4	1.0	2.0	1.75	1.25	1.25	N/A	N/A	N/A
Japan	0.7	-5.2	2.5	0.5	0.0	0.1	-0.10	0.03	0.06	109	108	108
Euro Area	1.2	-6.8	6.5	1.2	0.4	1.3	-0.25	-0.41	-0.18	1.12	1.13	1.18
Emerging Markets	3.8	-1.9	6.5	3.9	3.6	3.5	N/A	N/A	N/A	N/A	N/A	N/A
China	6.1	2.4	8.2	2.9	2.7	2.0	2.99	2.63	2.67	6.91	7.00	6.79

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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	2015	2016	2017	2018	2019	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	585	-4.3	5.6	21.6	-11.2	24.0	6.0	11.4	3.5	27.9	23.6	2.1
S&P 500	3500	-0.7	9.5	19.4	-6.2	28.9	7.0	12.9	8.3	27.0	26.4	1.7
DJIA	28430	-2.2	13.4	25.1	-5.6	22.3	7.6	10.1	-0.4	24.4	24.7	2.2
NASDAQ	11775	5.7	7.5	28.2	-3.9	35.2	9.6	17.1	31.2	63.5	38.0	0.8
Europe	2923	3.9	0.7	21.2	-18.5	22.5	4.3	7.7	-6.9	37.7	20.9	2.7
Japan	3341	9.1	0.4	21.8	-14.5	17.1	7.6	5.9	-6.9	26.6	20.9	2.4
Emerging Markets	1102	-17.0	8.6	34.3	-16.6	15.4	2.1	10.7	-1.2	20.1	18.1	2.3

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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	2015	2016	2017	2018	2019	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
Global	0.62	0.9	3.3	2.1	0.5	7.1	-0.8	0.4	4.4	10-Yr. U.S. Treasury	0.70
U.S.	1.04	0.5	2.7	3.6	0.0	8.9	-0.9	0.7	6.9	30-Yr. U.S. Treasury	1.47
Europe	0.05	1.1	3.3	0.5	0.5	6.0	-0.6	0.5	1.8	1-Yr. CD Rate	0.45
EM Sovereign	4.34	0.6	9.6	9.8	-4.1	14.8	0.3	4.1	1.4	30-Yr. Fixed Mortgage	3.10
U.S. High Yield	6.12	-5.6	17.8	7.0	-2.1	14.1	1.0	6.0	0.9	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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