Heading North in November

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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 15^th, 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.

Shawn Snyder Head of Investment Strategy,
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

Figure 1: 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%

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 November 30, 2019. 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
	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

❮ 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	2014	2015	2016	2017	2018	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
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

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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	2014	2015	2016	2017	2018	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
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

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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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