Monthly Market Snapshot: June 2021
Investors reversed course in June with S&P 500 Growth stocks rallying 5.6% and S&P 500 Value stocks slipping 1.3%. Interestingly, both indices hit all-time highs in June. The NASDAQ surged 5.5% as investors fled back to comfortable positions as the Federal Reserve signaled that the tapering of asset purchases and first interest rate hike may occur sooner than originally forecast. After four consecutive months of gains (rising 15.2% between the start of February and the end of May), the Dow Jones posted a 0.1% loss as the reopening trade took a pause. Outside the U.S., European stocks fell -2.4% while Japanese stocks slid 0.4%. Contrary to expectations, the 10-year U.S. Treasury yield fell for a third straight month – finishing the month at 1.47%.
All eyes will be on policymakers in the second half of the year. A U.S. infrastructure bill appears likely, though the potential changes in U.S. tax policy remain unclear, and every Fed meeting will likely be considered “live” as investors wait for an announcement on the tapering of bond purchases.
Citi’s Global Investment Committee (GIC) left its asset allocation unchanged at its June 23 meeting. The GIC’s overweight to Global Equity and REITS remains at +8%. Fixed Income and Cash remains at -8%.
The U.S. economy may expand by over 10% annualized in the second quarter. This pace of growth is unlikely to be sustained, but solid growth in 2022 still appears likely. President Biden and a group of bi-partisan Senators tentatively agreed on a roughly $1 trillion infrastructure bill. This bill is largely focused on traditional infrastructure (not social programs), but a second spending bill is likely forthcoming that will need to be passed through the reconciliation process. The cost will likely require some increases in U.S. taxes. On the monetary policy front, the Fed’s collective forecast signaled two rate hikes in 2023.
Stocks (Neutral Large-Cap; Underweight SMID)
Citi’s Global Investment Committee (GIC) maintains a neutral position on U.S. large-cap stocks and a underweight small- and middle-cap (SMID) stocks. While technology stocks have rebounded of late, we prefer value and cyclically-oriented names over the next few quarters as the economy normalizes. However, we envision an eventual shift in portfolios that is more in line with mid-cycle economic conditions as the recovery matures.
The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, and overweight U.S. Treasury-Inflation-Protected Securities (TIPS). Later this year, we expect to hear from the Fed that they intend to taper asset purchases. Although the 10-year U.S. Treasury yield has been on the decline of late, we still think that the economic backdrop argues for higher rates over time. Perhaps the 10-year U.S. Treasury yield nears 2.0% by year-end. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.
Europe and Japan
Economy (Europe: Recovering / Japan: Recovering)
Citi Research is looking for a resurgence in European economic activity in the second half of 2021. Surveys have surprised to the upside, suggesting that the recovery is occurring faster than originally thought. As a result, the forecast for 2021 GDP has been lifted by 0.7% to 4.9%. In Japan, the 2021 forecast has been raised by 0.3% to 2.3% as the pace of vaccinations has start to picked up.
Stocks (Europe: Overweight; Neutral SMID / Japan: Neutral)
The GIC maintains an overweight on UK equities, but neutral Europe ex UK. The GIC is also neutral on Japan large-caps. Non-U.S. small- and mid-cap stocks (SMID) are considered a neutral or slight underweight as well. In the UK, valuations remain cheap and the FTSE 100 is largely comprised of value-oriented Energy and Financial names, which we think can recover further.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Citi Research raised its 2021 growth forecast from 6.5% to 6.8% on the growth in 2021 on expectations for faster growth in Latin America. Asia is expected to grow by 7.8% in 2021 while Latin America is now expected to grow by 5.9% (versus a forecast of 5.1% previously).
Stocks (Overweight Asia and Latin America; Neutral China; Underweight EMEA)
The GIC is overweight emerging markets (Asia ex China and Latin America), but China remains a neutral weighting. Chinese stocks rallied sharply last year, so the GIC moved to a neutral in January. More broadly, Asian economies are positioned well for the trade and industrial rebound expected later this year. Regions like Latin America should recover as vaccines start to reach emerging markets, but the longer-term prospects look less enticing.
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||4,000|
|S&P 500 P/E Ratio||18.97x||27.43x||27.25x|
|S&P 500 EPS Growth||2.0%||-13.3%||29.2%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||-3.3||6.3||4.3||2.8||4.0||3.3||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||0.94||3.3||2.1||0.5||7.1||5.7||0.6||1.0||-1.9||10-Yr. U.S. Treasury||1.59|
|U.S.||1.55||2.7||3.6||0.0||8.9||7.7||0.8||2.0||-1.6||30-Yr. U.S. Treasury||2.28|
|Europe||0.13||3.3||0.5||0.5||6.0||4.1||0.4||-0.4||-2.3||1-Yr. CD Rate||0.29|
|EM Sovereign||4.50||9.6||9.8||-4.1||14.8||5.4||0.9||4.6||-1.6||30-Yr. Fixed Mortgage||3.10|
|U.S. High Yield||4.67||17.8||7.0||-2.1||14.1||6.3||1.3||2.7||3.6||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)