Investors Bought In May

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Monthly Market Snapshot: May 2021

Highlights

The old market adage of “Sell in May and Go Away,” did not happen. To the contrary, global equities actually rose 1.4% in the month. In the United States, the Dow Jones rallied 1.9% as cyclical shares rose while the NASDAQ slipped 1.5% as investors trimmed positions. The S&P 500 eked out a 0.5% gain. Europe outperformed with shares rising by 3.2% while Japanese shares climbed by 1.5%. The 10-year U.S. Treasury yield was largely unchanged during the month – falling from 1.63% to 1.59%. Fixed income returns were slightly positive for the month, but remain modestly negative year-to-date.

Investors remain focused on U.S. employment and inflation data as they attempt to determine the future path of Federal Reserve policy. The strength or weakness of the incoming data will likely determine the timing of the Fed’s decision to taper its asset purchases. The most likely timeframe remains late 2021 or early 2022. Labor market distortions are adding to the uncertainty.

After reducing its equity allocation slightly last month and taking other portfolio actions in anticipation of higher market volatility, Citi’s Global Investment Committee (GIC) left its asset allocation unchanged at its May 19 meeting. Our 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 grew by annualized rate of 6.4% in the first quarter of 2021 and is on track to expand by just over 10% annualized in the second quarter. A sustained rebound in service sector activity is well underway with over 50% of U.S. adults having received at least one dose of vaccine. The labor market continues to improve, but the weaker April jobs print has left investors questioning if pandemic benefits are leading to labor shortages – despite elevated unemployment levels. Labor shortages should ease as more states end pandemic unemployment insurance programs. An initial draft of an infrastructure bill (or bills) should be available soon. The cost of these plans will likely be partially offset by higher taxes.

Stocks (Neutral Large-Cap; Underweight SMID)

Citi’s Global Investment Committee (GIC) maintains a neutral position on U.S. stocks, but lowered its allocation to large-cap stocks during its previous meeting in a step towards de-risking. Small- and middle-cap (SMID) stocks are an underweight in the portfolio. We prefer value and cyclically-oriented names over the next few quarters as the economy normalizes and interest rates likely grind higher. Eventually, we envision a shift in portfolios that is more in line with mid-cycle economic conditions, but we do not believe we are there just yet.

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). In the next few months, we expect to hear from the Fed that they intend to taper asset purchases in the near future. We expect a range of 1.50%-2.00% in 2021 for the 10-year U.S. Treasury yield, but see it trending toward 2.50% in future expansion years. For taxable US investors, muni yields are attractive relative to other taxable high-quality bonds.

Europe and Japan

Economy (Europe: Recovering / Japan: Recovering)

The acceleration of vaccinations amid supportive government policy should lead to a resurgence in economic activity in the second half of 2021. Citi Research’s economists do not see inflation as a concern. The 2021 GDP forecast has been lifted by 0.8% to 4.2%. In Japan, the 2021 forecast has been raised by 0.4% to 2.0% to reflect a smaller-than-expected supply chain shock.

Stocks (Europe: Overweight; Neutral SMID / Japan: Neutral)

The GIC maintains an overweight on UK equities, but is largely 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, the end of a long period of Brexit uncertainty is raising confidence in an independent Great Britain and valuations remain cheap. An improved COVID response may be the first indicator of economic recovery.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

Citi Research expects emerging market economies to rebound from a -1.7% decline to 6.5% growth in 2021. Asia is expected to grow by 7.8% in 2021 while Latin America is expected to grow by 5.1%.

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. Regions like Latin America should recover as vaccines start to reach emerging markets. The longer-term outlook looks more cautious beyond the potential global equity rebound over the next year.

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	22.83x
S&P 500 EPS Growth	2.0%	-13.3%	21.2%
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 May 31, 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	5.8	4.0	2.0	2.8	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	-3.3	6.0	4.2	2.8	3.9	3.3	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	-4.9	5.2	3.5	0.7	2.0	1.7	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	-4.8	2.0	3.0	0.0	-0.2	0.6	0.03	0.10	0.15	107	111	112
Euro Area	-6.7	4.2	4.2	0.3	1.8	1.4	-0.52	-0.22	-0.01	1.14	1.19	1.16
Emerging Markets	-1.7	6.5	4.7	3.6	3.9	3.4	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	3.20	6.90	6.44	6.04

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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	711	5.6	21.6	-11.2	41.8	14.3	1.4	5.7	10.1	27.2	19.5	1.7
S&P 500	4204	9.5	19.4	-6.2	49.8	16.3	0.5	5.8	11.9	29.8	22.4	1.4
DJIA	34529	13.4	25.1	-5.6	31.2	7.2	1.9	4.7	12.8	26.2	20.4	1.7
NASDAQ	13749	7.5	28.2	-3.9	94.2	43.6	-1.5	3.8	6.7	90.0	31.9	0.7
Europe	3689	0.7	21.2	-18.5	26.7	3.4	3.2	7.2	13.6	41.8	18.8	2.1
Japan	3883	0.4	21.8	-14.5	31.3	12.2	1.5	-0.1	0.7	20.0	16.5	2.0
Emerging Markets	1376	8.6	34.3	-16.6	33.7	15.8	2.1	4.5	6.6	17.4	14.9	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	0.91	3.3	2.1	0.5	7.1	5.7	0.1	0.4	-2.4	10-Yr. U.S. Treasury	1.59
U.S.	1.50	2.7	3.6	0.0	8.9	7.7	0.2	1.1	-2.4	30-Yr. U.S. Treasury	2.28
Europe	0.12	3.3	0.5	0.5	6.0	4.1	-0.1	-0.8	-2.6	1-Yr. CD Rate	0.29
EM Sovereign	4.52	9.6	9.8	-4.1	14.8	5.4	1.3	3.7	-2.5	30-Yr. Fixed Mortgage	3.10
U.S. High Yield	4.82	17.8	7.0	-2.1	14.1	6.3	0.3	1.3	2.3	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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