Monthly Market Snapshot: February 2021
Market activity has been frenzied over the past few weeks with heavily shorted stocks being whipsawed and bond yields surging. However, the MSCI All Country World Index still climbed 2.2% in February. In the United States, the S&P 500 gained 2.6% while the Dow Jones jumped 3.2% as the reopening trade progressed further. The tech-heavy NASDAQ added just 0.9% as shares came under pressure due to rising interest rates. The 10-year U.S. Treasury yield rose rapidly from 1.07% to 1.40% by month end.
Rising bond yields on the long end of the curve are largely reflecting a pick up in growth expectations, but also concerns about potential inflation. We expect to see modestly higher inflation prints in the months ahead, but we do not envision the Federal Reserve tightening monetary policy anytime soon. As the market digests the stronger outlook for growth and potential exit of the pandemic, value and cyclical stocks will likely continue to get a bid moving forward.
The Citi Private Bank Global Investment Committee’s (GIC) global equity allocation (including REITS) remains 9.0% overweight. Global Fixed Income is 9.5% underweight. Gold remains 1.5% overweight for diversification and as an inflation hedge. Cash is 1% underweight.
The roll-out of vaccines is keeping Citi’s economists confident that the U.S. economy will experience a sharp rebound in 2021. Combined with a fiscal stimulus package that is likely to be north of $1.5 trillion, real growth could climb by 5.4% this year. We do envision higher inflation prints in the months ahead on the back of base effects (comparing this year’s data to last year’s), but discussions of persistent inflation seem somewhat premature. The Fed will likely view an uptick in prices as largely temporary.
Citi Private Bank’s Global Investment Committee is neutral on U.S. stocks. After putting in place an overweight on small- and mid-cap shares (SMID) back in April 2020, the GIC moved back to a neutral after the asset class nearly doubled. Significant stimulus from the Fed and U.S. congress will provide continued economic support, but valuations appear full. We remain focused on areas of the market that still offer some value – particularly Cyclical sectors like Industrials, Energy, Financials, and Real Estate Investment Trusts Securities (REITS) – which should benefit from the economic recovery.
The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, while overweight on US Treasury-Inflation Protected Securities (TIPS). Overall, we expect rates to trend higher on a 2021 cyclical recovery and higher U.S. debt burdens. The 10-year Treasury yield could be in the 1.5% to 2.0% range in the back half of the year. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.
Europe and Japan
Economy (Europe: Contracting / Japan: Recovering)
In Europe, a negative real GDP print in the first quarter is possible, but economic activity should pick up as vaccination campaigns gather steam. This should allow the European Union’s economy to grow by about 3.6% in 2021 (after a plunge of 6.8% in 2020). In Japan, Citi’s economists revised up their 2021 forecasts by 0.5% to 1.8%. Herd immunity could possibly be reached in early 2022 and lead to even stronger growth then (currently penciled in at 2.5%).
Stocks (Europe: Overweight; Overweight SMID / Japan: Overweight; Overweight SMID)
The GIC has moved to an overweight on both Europe and Japan large-caps, as well as small- and mid-cap stocks (SMID). The public health situation is improving rapidly in the UK and restrictions may be eased throughout Europe once vaccination supply issues get resolved. Both the European Union and Japan should benefit from a recovery in global trade and cheaper valuations relative to U.S. large-cap shares also make the regions appealing.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Citi’s economists expect emerging market economies to rebound from -1.9% to 6.2% in 2021. Although vaccine rollouts may take longer in EM and stretch well into 2022. In China, growth looks set to rise from 2.3% in 2020 to 8.2% in 2021 as household consumption drives growth amid strong virus containment.
The GIC is overweight emerging markets (Asia and Latin America), but moved to a neutral on China as shares have already climbed significantly. Regions like Latin America may play catch up as shares have severely underperformed relative to other markets. The longer-term outlook looks more cautious.
The GIC has resumed an overweight on emerging market fixed income as valuations still look relatively attractive when compared to U.S. corporates. 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||27.95x||22.93x|
|S&P 500 EPS Growth||2.0%||-16.8%||21.9%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||-3.3||5.7||4.0||2.8||3.3||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||0.53||3.3||2.1||0.5||7.1||5.7||1.3||-2.4||-2.4||10-Yr. U.S. Treasury||1.40|
|U.S.||1.01||2.7||3.6||0.0||8.9||7.7||3.1||-2.4||-2.4||30-Yr. U.S. Treasury||2.15|
|Europe||-0.13||3.3||0.5||0.5||6.0||4.1||-0.1||-2.0||-2.0||1-Yr. CD Rate||0.34|
|EM Sovereign||4.16||9.6||9.8||-4.1||14.8||5.4||-0.7||-4.2||-4.2||30-Yr. Fixed Mortgage||3.25|
|U.S. High Yield||5.05||17.8||7.0||-2.1||14.1||6.3||7.0||0.6||0.6||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)