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Monthly Market Snapshot: November 2019
Highlights
As winter approaches, stocks headed north instead of south in November with global equities rallying an impressive 2.3% during the month. Performance was even stronger in the U.S. with the S&P 500 surging 3.4% as recession fears continued to fade as trade tensions appeared to ease. International returns were slightly lower with European shares rising just 1.5% and Japanese shares eking out a 0.6% gain. Emerging markets slipped 0.2%.
Global manufacturing surveys (outside of the U.S.) have improved of late and may be signaling a bottoming out of the global economy. In the U.S., the decline in manufacturing activity has been sharper than the decline in consumer demand — which should imply an eventual rebound in production. However, a re-escalation of trade tensions (or a fresh round of tariffs) could pose a risk to this narrative. Investors will be focused on December 15th, which is when the next round of U.S. tariffs on Chinese goods are scheduled to take effect.
Citi’s Private Bank’s Global Investment Committee (GIC) moved from a neutral position on global equities to an overweight position. This move was funded by a decline in the cash position and a deeper underweight in European sovereign debt.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Slowing)
Popular gross domestic product (GDP) trackers have the U.S. economy tracking at an annualized rate of about 1.0% in the fourth quarter of 2019. Weak manufacturing surveys and soft business investment suggest that growth remains challenged, but there are some signs that activity could pick up a bit in the first half of 2020. Solid consumer spending should keep the economy afloat next year, but risks are likely still titled towards the downside.
Stocks (Overweight)
Citi Private Bank’s Global Investment Committee has moved to an overweight on U.S. stocks. Assuming the economy avoids recession, there should be further gains ahead as activity rebounds. Although we think that next year’s gains will likely be sub-par when compared to this year — perhaps in the 6.0% to 7.0% range. Citi’s GIC favors equities with consistent dividend growth.
Bonds (Overweight)
The Federal Reserve appears to be in a holding pattern, but financial markets have become increasingly convinced that the Fed will remain supportive for a lengthy period of time. Citi’s economists expect the Fed to remain on hold in 2020, but acknowledge that the odds of an additional rate cut seem higher than the odds for a rate hike. While maintaining an overweight on short and intermediate-duration U.S. Treasuries and intermediate-duration investment grade corporate bonds, we expect lower returns ahead.
Europe and Japan
Economy (Slowing)
Citi’s economists believe that euro area growth should bottom out in the second quarter of 2020 at a rate of about 0.8% year-on-year. Importantly, there are already some signs that German manufacturing may be stabilizing, which would be meaningful. In terms of Japan, Citi’s economists are keeping their 2019 forecast unchanged at 1.0%, but have raised their 2020 forecast from an annual rate of just 0.1% to 0.3% as typhoon disaster relief may boost growth.
Stocks (Europe: Overweight / Japan: Overweight)
The GIC moved to an overweight on European (ex-UK) stocks as recession fears have eased. The European Central Bank remains accommodative, the manufacturing sector is tentatively recovering, and pressures are mounting for fiscal policy. This should support our selective approach. The Committee is also moving to an overweight position on Japanese equities as the latest round of consumption tax hikes are likely to be less severe than in 2014.
Bonds (Underweight)
The GIC sees European and Japanese sovereign bond yields as unacceptable and have moved to a deep underweight.
Emerging Markets
Economy (Slowing)
Emerging market economies are expected to slow from 4.5% in 2018 to 4.0% in 2019. However, growth should rebound to 4.3% in 2020. In China, our economists are expecting growth for 2019 to ease to 6.2% (vs. 6.6% in 2018). In 2020, growth may ease even further to 5.8%.
Stocks (Overweight)
We are maintaining our overweight on emerging market shares with a preference towards emerging Asia. Loose Fed policy and an uptick in Chinese activity should benefit emerging Asia economies and support equities in the months ahead.
Bonds (Slightly Overweight)
We are overweight emerging market fixed income — specifically in emerging Asia and Latin America.
U.S. Stock Market and Economic Forecasts
| Indicator | 2018A | 2019F | 2020F |
|---|---|---|---|
| S&P 500 Target | 2,507 | 3,050 | 3,375 |
| S&P 500 P/E Ratio | 15.43x | 18.97x | 18.10x |
| S&P 500 EPS Growth | 22.5% | 2.0% | 4.8% |
| GDP | 2.9% | 2.3% | 2.0% |
| Inflation | 2.0% | 1.5% | 1.8% |
| Unemployment Rate | 3.9% | 3.7% | 3.5% |
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 | 2.7 | 2.7 | 2.8 | 2.4 | 2.5 | 2.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 3.2 | 3.4 | 3.7 | 3.1 | 3.2 | 3.2 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 1.7 | 1.5 | 1.6 | 1.3 | 1.5 | 1.7 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 2.3 | 2.0 | 1.8 | 1.5 | 1.8 | 2.0 | 1.75 | 1.25 | 1.25 | N/A | N/A | N/A |
| Euro Area | 1.1 | 1.0 | 1.5 | 1.2 | 1.2 | 1.5 | -0.29 | -0.36 | -0.06 | 1.11 | 1.11 | 1.19 |
| Japan | 1.0 | 0.3 | 0.5 | 0.5 | 0.8 | 0.8 | -0.15 | -0.06 | 0.15 | 108 | 103 | 94 |
| Emerging Markets | 4.0 | 4.3 | 4.4 | 3.9 | 3.8 | 3.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 6.2 | 5.8 | 5.6 | 2.7 | 2.4 | 2.0 | 3.01 | 2.95 | 2.95 | 6.98 | 7.21 | 6.63 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2014 | 2015 | 2016 | 2017 | 2018 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 547 | 2.1 | -4.3 | 5.6 | 21.6 | -11.2 | 2.3 | 5.0 | 20.0 | 19.1 | 17.0 | 2.5 |
| S&P 500 | 3141 | 11.4 | -0.7 | 9.5 | 19.4 | -6.2 | 3.4 | 5.5 | 25.3 | 20.5 | 18.8 | 1.9 |
| DJIA | 28051 | 7.5 | -2.2 | 13.4 | 25.1 | -5.6 | 3.7 | 4.2 | 20.3 | 18.9 | 18.5 | 2.3 |
| NASDAQ | 8665 | 13.4 | 5.7 | 7.5 | 28.2 | -3.9 | 4.5 | 8.3 | 30.6 | 31.4 | 25.9 | 1.0 |
| Europe | 3050 | 1.2 | 3.9 | 0.7 | 21.2 | -18.5 | 1.5 | 4.9 | 19.0 | 19.5 | 15.1 | 3.4 |
| Japan | 3371 | 7.1 | 9.1 | 0.4 | 21.8 | -14.5 | 0.6 | 5.4 | 14.8 | 15.7 | 14.6 | 2.4 |
| Emerging Markets | 1040 | -4.6 | -17.0 | 8.6 | 34.3 | -16.6 | -0.2 | 3.9 | 7.7 | 15.0 | 13.8 | 2.8 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2014 | 2015 | 2016 | 2017 | 2018 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.37 | 7.9 | 0.9 | 3.3 | 2.1 | 0.5 | -0.3 | -0.5 | 7.5 | 10-Yr. U.S. Treasury | 1.78 |
| U.S. | 2.32 | 5.9 | 0.5 | 2.7 | 3.6 | 0.0 | 0.0 | 0.3 | 8.9 | 30-Yr. U.S. Treasury | 2.21 |
| Europe | 0.12 | 11.2 | 1.1 | 3.3 | 0.5 | 0.5 | -0.6 | -1.5 | 6.8 | 1-Yr. CD Rate | 1.14 |
| EM Sovereign | 5.24 | 7.1 | 0.6 | 9.6 | 9.8 | -4.1 | -0.2 | -0.2 | 12.2 | 30-Yr. Fixed Mortgage | 3.73 |
| U.S. High Yield | 6.36 | 1.8 | -5.6 | 17.8 | 7.0 | -2.1 | 0.5 | 0.7 | 11.8 | Prime Rate | 4.75 |
Asset Class Returns (Sorted by Performance)
