January Tests New Year Resolutions

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Monthly Market Snapshot: January 2020

Highlights

Strong equity market momentum took a step back in January as the spreading of the coronavirus forced investors to test their resolutions. In the United States, year-to-date gains were erased with the S&P 500 closing the month largely unchanged. Emerging markets were not so lucky with the virus shaving 4.7% off of the MSCI emerging markets index. Safe-haven assets outperformed with the U.S. broad investment grade bond index returning 2.0%.

Temporary factors continue to cloud the outlook. While investors have been expecting growth to rebound, temporary drags on GDP like the coronavirus and Boeing’s stalled aircraft production are likely to weigh on growth in the near-term. With stocks having such a strong rally in 2019, we would not be surprised to see an increase in market volatility as investors reassess.

Citi’s Private Bank’s Global Investment Committee (GIC) shifted its equity weightings by adding to its overweight in China and reducing its overweight to other Asia-Pacific markets and the U.S. With Chinese stocks selling off sharply, now may be a good time to add exposure as the impact of the coronavirus is likely to be temporary. The Committee funded this move by slightly reducing its exposure to the U.S., where prices remain elevated.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Stabilizing)

The U.S. economy grew by an annualized rate of 2.1% in the fourth quarter of 2019. However, growth in the first quarter of 2020 is likely to be weaker with a series of temporary factors like the coronavirus and stalled aircraft production likely to weigh on growth. While perhaps too early to call, we suspect that growth will rebound in subsequent quarters as these factors start to fade. Citi’s economists are looking for year-on-year growth of around 2.0% in 2020.

Stocks (Overweight)

Citi Private Bank’s Global Investment Committee decided to slightly reduce its overweight to U.S. stocks after the sharp rally over the past few months. However, growth still appears to be on a solid trajectory for now, which should lead to gains down the road. Though probably not without increased volatility given the frothy level of valuations. We continue to expect annual gains in the range of 5.0% to 7.0%. Citi’s GIC favors equities with consistent dividend growth and strong balance sheets.

Bonds (Overweight)

The Federal Reserve has signaled that the threshold for a rate hike is quite high. Even though a rate cut is not being signaled by the Fed, financial markets are projecting an additional rate cut in September as the coronavirus may drag down growth a bit. 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 (Europe: Stabilizing / Japan: Slowing)

Citi’s economists believe that arguments are stacked in favor of a rebound in euro area growth with the region potentially growing at a rate of about 1.2% year-on-year in 2020. Importantly, Germany’s ZEW expectations survey jumped from 10.7 in December to 26.7 in January. Combined with several other indicators, a picture is starting to form that shows Germany’s economy stabilizing. In terms of Japan, growth remains elusive with Citi’s economists looking for just 0.2% year-on-year growth in 2020.

Stocks (Europe: Overweight / Japan: Overweight)

The GIC maintains an overweight on both European (ex-UK) and Japanese stocks. In Europe, cheap valuations and the de-escalation of trade tensions are positives. However, the European Central Bank seems to be running low on stimulus tools. The GIC is overweight, but still a bit cautious. In Japan, the Committee remains overweight, but selective.

Bonds (Underweight)

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

Emerging Markets

Economy (Unclear)

Emerging market economies were expected to rebound with grow rising from 3.9% in 2019 to 4.2% in 2020. However, the coronavirus clouds the outlook. Citi’s economists think that year-on-year growth in China may slow from 6.0% in the fourth quarter of 2019 to 4.8% in the first quarter of 2020. Uncertainty remains high, but growth should rebound with China if the virus can be contained.

Stocks (Overweight)

The GIC added to its overweight in Greater China markets. Regional equity markets have slumped quickly in response to the coronavirus, but we see the economic impact as temporary and believe this provides an opportunity to add to tactical allocations. Of the emerging market regions, our preference remains slanted towards emerging Asia and Latin America.

Bonds (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	19.08x
S&P 500 EPS Growth	22.5%	2.0%	4.8%
GDP	2.9%	2.3%	2.0%
Inflation	2.0%	1.5%	1.9%
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 January 31, 2020. 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	2.7	2.5	2.7	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	3.1	3.3	3.6	3.2	3.3	3.1	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	1.7	1.5	1.5	1.3	1.6	1.6	N/A	N/A	N/A	N/A	N/A	N/A
United States	2.3	2.0	1.9	1.5	1.9	1.8	1.75	1.25	1.25	N/A	N/A	N/A
Euro Area	1.2	1.2	1.5	1.2	1.4	1.6	-0.29	-0.26	-0.21	1.12	1.15	1.19
Japan	1.0	0.2	1.0	0.5	0.7	0.6	-0.11	-0.01	0.15	109	104	96
Emerging Markets	3.9	4.2	4.3	4.0	4.1	3.4	N/A	N/A	N/A	N/A	N/A	N/A
China	6.2	5.8	5.6	2.9	3.2	1.9	2.99	2.87	2.79	6.91	6.95	6.65

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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	2014	2015	2016	2017	2018	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	559	2.1	-4.3	5.6	21.6	-11.2	-1.2	-1.2	-1.2	19.5	16.5	2.4
S&P 500	3226	11.4	-0.7	9.5	19.4	-6.2	-0.2	-0.2	-0.2	21.9	18.9	1.8
DJIA	28256	7.5	-2.2	13.4	25.1	-5.6	-1.0	-1.0	-1.0	20.5	18.1	2.2
NASDAQ	9151	13.4	5.7	7.5	28.2	-3.9	2.0	2.0	2.0	34.7	25.4	1.0
Europe	3013	1.2	3.9	0.7	21.2	-18.5	-4.0	-4.0	-4.0	20.5	14.5	3.3
Japan	3390	7.1	9.1	0.4	21.8	-14.5	-1.4	-1.4	-1.4	15.2	14.5	2.4
Emerging Markets	1062	-4.6	-17.0	8.6	34.3	-16.6	-4.7	-4.7	-4.7	14.8	12.6	2.7

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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	1.9	1.9	1.9	10-Yr. U.S. Treasury	1.51
U.S.	2.32	5.9	0.5	2.7	3.6	0.0	2.0	2.0	2.0	30-Yr. U.S. Treasury	2.00
Europe	0.12	11.2	1.1	3.3	0.5	0.5	2.1	2.1	2.1	1-Yr. CD Rate	1.08
EM Sovereign	5.24	7.1	0.6	9.6	9.8	-4.1	1.7	1.7	1.7	30-Yr. Fixed Mortgage	3.63
U.S. High Yield	6.36	1.8	-5.6	17.8	7.0	-2.1	0.0	0.0	0.0	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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