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Monthly Market Snapshot: January 2021
Highlights
Financial markets are off to a bumpy start in early 2021 with stocks drifting lower across several regions. The MSCI All Country World Index, a broad measure of stocks globally, fell by 0.5% in January. However, this comes after a 17.3% rally in November and December. In the United States, the S&P 500 slipped 1.1% while the Dow Jones tumbled 2.0%. The tech-heavy NASDAQ bucked the trend and rose by 1.4%. Over the month, the 10-year U.S. Treasury yield jumped 15 basis points to 1.07% on expectations for more fiscal spending.
After such strong returns in 2020 it would not be surprising to see a period of market consolidation ahead. However, we remain confident that this is just the beginning of lasting global economic expansion and that corporate earnings will rebound materially over the next couple of years. This should support equities.
Citi Private Bank’s Global Investment Committee (GIC) shifted from an overweight on U.S. small- and mid-capitalization stocks and North Asia’s emerging markets (including China) to a neutral position. As a partial offset, the GIC added an overweight position on the global healthcare sector which has much better valuations relative to other sectors and stable growth fundamentals.
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Regional Outlook
United States
Economy (Recovering)
The U.S. economy expanded by an annualized rate of 4.0% in the fourth quarter of 2020. Although a more moderate pace than in the third quarter, the U.S. economy continues to recover from its COVID-led exogenous shock. We anticipate further recovery ahead with signs pointing to above-trend growth in the second half of 2021. Modest upside risk to inflation may be building as fiscal spending continues to climb. The unemployment rate may fall from 6.7% to 5.5% by year end.
Stocks (Neutral)
Citi Private Bank’s Global Investment Committee has been neutral on U.S. large-cap stocks for some time due to valuations in the Technology sector, but has now also moved from an overweight to a neutral on small- and mid-cap stocks as well after the Russell 2000 rallied 119% between March 18, 2020 and January 22, 2021. We are not expecting a repeat of 2020’s returns, but do think that equities may be able to push modestly higher if companies experience a strong earnings recovery and the Fed’s monetary policy remains blatantly accommodative. Signs of either condition faltering could lead to a setback. We remain focused on Industrials, Financials, and Real Estate Investment Trusts Securities (REITS).
Bonds (Underweight)
The GIC is underweight short-duration and neutral on intermediate- and long-duration U.S. Treasuries while holding an overweight to U.S. Treasury-Inflation Protected Securities (TIPS). Aggressive monetary policy across the world may limit how far long-dated yields can rise, but we expect to see a rebound in rates in 2021 as the economy recovers more fully. For taxable U.S. investors, muni yields are attractive relative to other high-quality bonds.
Europe and Japan
Economy (Europe: Contracting / Japan: Recovering)
In Europe, a technical recession may occur due to new COVID restrictions, but we expect a relaxation of restrictions in spring could drive a sizable rebound later in the year. The Euro Area’s economy could still grow by about 3.7% this year. In Japan, Citi’s economists revised down their 2021 GDP forecast by 0.7% to 1.3% on a state of emergency declaration. Political changes could be on the way in 2022.
Stocks (Europe: Overweight; Overweight SMID / Japan: Overweight; Overweight SMID)
The GIC maintains an overweight on both Europe and Japan large-caps, as well as small- and mid-cap stocks (SMID). Virus containment remains a challenge in Europe, but the European Union should benefit from a recovery in global trade and valuations are cheaper relative to U.S. large-cap shares. Japanese large-cap stocks also appear poised to benefit from trade.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Recovering)
Citi’s economists expect emerging market economies to rebound from -1.9% to 6.2% in 2021. Although vaccine rollouts may take longer in EM and stretch well into 2022. In China, growth looks set to rise from 2.3% in 2020 to 8.2% in 2021 as household consumption drives growth amid strong virus containment.
Stocks (Overweight Asia and Latin America; Neutral China and EMEA)
The GIC is overweight emerging markets (Asia and Latin America). However, we have moved to neutral on China and North Asia as stocks have experience a strong run across the region. Other regions like Latin America may play catch up in the year ahead which is why we maintain an overweight. We are more cautious about the regions outlook over the longer-term.
Bonds (Overweight)
The GIC has resumed an overweight on emerging market fixed income as valuations still look relatively attractive when compared to U.S. corporates. In local bonds, future returns may be driven by foreign exchange movements.
U.S. Stock Market and Economic Forecasts
| Indicator | 2019A | 2020F | 2021F |
|---|---|---|---|
| S&P 500 Target | 3,231 | 3,300 | 3,800 |
| S&P 500 P/E Ratio | 18.97x | 27.24x | 22.68x |
| S&P 500 EPS Growth | 2.0% | -16.8% | 21.9% |
| GDP (YoY) | 2.2% | -3.5% | 5.2% |
| Inflation (YoY) | 1.5% | 1.2% | 1.9% |
| Unemployment Rate | 3.7% | 8.1% | 5.9% |
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | 2020F | 2021F | 2022F | |
| Global | -3.7 | 5.0 | 3.7 | 1.9 | 2.2 | 2.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | -3.5 | 5.5 | 3.8 | 2.8 | 3.2 | 3.2 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | -5.1 | 4.1 | 3.0 | 0.7 | 1.4 | 1.6 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | -3.5 | 5.2 | 1.6 | 1.2 | 1.9 | 2.0 | 0.91 | 1.45 | 1.45 | N/A | N/A | N/A |
| Japan | -5.2 | 1.3 | 2.6 | 0.1 | -0.3 | 0.5 | 0.03 | 0.05 | 0.05 | 107 | 100 | 96 |
| Euro Area | -7.0 | 3.7 | 4.7 | 0.3 | 1.0 | 1.2 | -0.52 | -0.40 | -0.17 | 1.14 | 1.26 | 1.27 |
| Emerging Markets | -1.9 | 6.2 | 4.6 | 3.5 | 3.3 | 3.4 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 2.3 | 8.2 | 5.5 | 2.5 | 1.2 | 2.2 | 2.96 | 3.21 | 3.23 | 6.90 | 6.18 | 6.05 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 643 | -4.3 | 5.6 | 21.6 | -11.2 | 41.8 | -0.5 | -0.5 | -0.5 | 32.3 | 20.4 | 1.8 |
| S&P 500 | 3714 | -0.7 | 9.5 | 19.4 | -6.2 | 49.8 | -1.1 | -1.1 | -1.1 | 30.6 | 22.6 | 1.5 |
| DJIA | 29983 | -2.2 | 13.4 | 25.1 | -5.6 | 31.2 | -2.0 | -2.0 | -2.0 | 27.1 | 20.3 | 2.0 |
| NASDAQ | 13071 | 5.7 | 7.5 | 28.2 | -3.9 | 94.2 | 1.4 | 1.4 | 1.4 | 66.9 | 33.9 | 0.7 |
| Europe | 3159 | 3.9 | 0.7 | 21.2 | -18.5 | 26.7 | -2.7 | -2.7 | -2.7 | 53.5 | 18.1 | 2.2 |
| Japan | 3816 | 9.1 | 0.4 | 21.8 | -14.5 | 31.3 | -1.0 | -1.0 | -1.0 | 31.4 | 21.9 | 2.0 |
| Emerging Markets | 1330 | -17.0 | 8.6 | 34.3 | -16.6 | 33.7 | 3.0 | 3.0 | 3.0 | 26.1 | 16.5 | 1.8 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 0.53 | 0.9 | 3.3 | 2.1 | 0.5 | 7.1 | -0.6 | -0.6 | -0.6 | 10-Yr. U.S. Treasury | 1.07 |
| U.S. | 1.01 | 0.5 | 2.7 | 3.6 | 0.0 | 8.9 | -0.8 | -0.8 | -0.8 | 30-Yr. U.S. Treasury | 1.83 |
| Europe | -0.13 | 1.1 | 3.3 | 0.5 | 0.5 | 6.0 | -0.4 | -0.4 | -0.4 | 1-Yr. CD Rate | 0.36 |
| EM Sovereign | 4.16 | 0.6 | 9.6 | 9.8 | -4.1 | 14.8 | -1.4 | -1.4 | -1.4 | 30-Yr. Fixed Mortgage | 2.88 |
| U.S. High Yield | 5.05 | -5.6 | 17.8 | 7.0 | -2.1 | 14.1 | 0.4 | 0.4 | 0.4 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
