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Growth Rebounds in June

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Monthly Market Snapshot: June 2021

Highlights

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%.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

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.

Bonds (Neutral)

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.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

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

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

Indicator	2019A	2020A	2021F
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%
GDP (YoY)	2.2%	-3.5%	6.4%
Inflation (YoY)	1.5%	1.2%	2.7%
Unemployment Rate	3.7%	8.1%	5.2%

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 June 30, 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
	2020A	2021F	2022F	2020A	2021F	2022F	2020A	2021F	2022F	2020A	2021F	2022F
Global	-3.5	6.0	4.2	2.0	2.9	2.5	N/A	N/A	N/A	N/A	N/A	N/A
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
Industrial Countries	-4.9	5.5	3.7	0.7	2.1	1.8	N/A	N/A	N/A	N/A	N/A	N/A
United States	-3.5	6.4	3.3	1.2	2.7	2.1	0.91	2.00	2.00	N/A	N/A	N/A
Japan	-4.7	2.3	3.5	0.0	-0.2	0.6	0.03	0.10	0.15	107	111	112
Euro Area	-6.7	4.9	4.4	0.3	1.9	1.5	-0.52	-0.22	-0.03	1.14	1.20	1.16
Emerging Markets	-1.7	6.8	4.7	3.6	4.1	3.5	N/A	N/A	N/A	N/A	N/A	N/A
China	2.3	8.8	5.5	2.5	1.8	2.0	2.96	3.30	3.35	6.90	6.39	6.06

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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	2016	2017	2018	2019	2020	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	720	5.6	21.6	-11.2	41.8	14.3	1.2	6.9	11.4	27.4	19.5	1.7
S&P 500	4298	9.5	19.4	-6.2	49.8	16.3	2.2	8.2	14.4	30.6	22.7	1.3
DJIA	34503	13.4	25.1	-5.6	31.2	7.2	-0.1	4.6	12.7	25.9	20.2	1.7
NASDAQ	14504	7.5	28.2	-3.9	94.2	43.6	5.5	9.5	12.5	105.2	33.4	0.6
Europe	3600	0.7	21.2	-18.5	26.7	3.4	-2.4	4.6	10.9	41.3	18.4	2.1
Japan	3868	0.4	21.8	-14.5	31.3	12.2	-0.4	-0.5	0.3	20.1	16.2	2.0
Emerging Markets	1375	8.6	34.3	-16.6	33.7	15.8	-0.1	4.4	6.5	17.0	14.5	1.9

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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	0.94	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

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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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2021 Mid-Year Outlook on U.S. Markets (64:00)