February Frenzy

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Monthly Market Snapshot: February 2021

Highlights

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.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

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.

Stocks (Neutral)

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.

Bonds (Underweight)

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.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

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.

Stocks (Overweight)

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.

Bonds (Overweight)

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

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

Indicator	2019A	2020F	2021F
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%
GDP (YoY)	2.2%	-3.5%	5.4%
Inflation (YoY)	1.5%	1.2%	2.0%
Unemployment Rate	3.7%	8.1%	5.7%

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 February 28, 2021. 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
	2020F	2021F	2022F	2020F	2021F	2022F	2020F	2021F	2022F	2020F	2021F	2022F
Global	-3.6	5.2	3.9	2.0	2.3	2.3	N/A	N/A	N/A	N/A	N/A	N/A
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
Industrial Countries	-5.0	4.3	3.4	0.7	1.6	1.5	N/A	N/A	N/A	N/A	N/A	N/A
United States	-3.5	5.4	3.0	1.2	2.0	1.9	0.91	1.45	1.45	N/A	N/A	N/A
Japan	-4.8	1.8	2.5	0.1	0.1	0.6	0.03	0.09	0.10	107	101	97
Euro Area	-6.8	3.6	4.3	0.3	1.4	1.2	-0.52	-0.40	-0.17	1.14	1.26	1.27
Emerging Markets	-1.7	6.4	4.6	3.6	3.3	3.4	N/A	N/A	N/A	N/A	N/A	N/A
China	2.3	8.2	5.5	2.5	1.2	2.2	2.96	3.21	3.23	6.90	6.21	5.81

❮ Swipe left for more

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	2016	2017	2018	2019	2020	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	657	5.6	21.6	-11.2	41.8	14.3	2.2	1.7	1.7	32.3	20.3	1.8
S&P 500	3811	9.5	19.4	-6.2	49.8	16.3	2.6	1.5	1.5	31.6	22.6	1.5
DJIA	30932	13.4	25.1	-5.6	31.2	7.2	3.2	1.1	1.1	28.0	20.7	1.9
NASDAQ	13192	7.5	28.2	-3.9	94.2	43.6	0.9	2.4	2.4	71.2	33.2	0.7
Europe	3297	0.7	21.2	-18.5	26.7	3.4	4.4	1.5	1.5	55.4	18.3	2.1
Japan	3873	0.4	21.8	-14.5	31.3	12.2	1.5	0.5	0.5	28.3	21.1	1.9
Emerging Markets	1339	8.6	34.3	-16.6	33.7	15.8	0.7	3.7	3.7	24.9	16.2	1.8

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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	2016	2017	2018	2019	2020	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
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

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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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