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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.
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
| 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% |
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 |
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 | 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 |
| 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 | 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 |
Asset Class Returns (Sorted by Performance)
