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Monthly Market Snapshot: October 2020
Highlights
Globally, stocks slipped in October as investors treaded cautiously ahead of the U.S. presidential election and reassessed the impact of renewed (partial) lockdowns across Europe. In the United States, the S&P 500 fell by 2.8% in the month while the Dow Jones tumbled 4.6%. The tech-heavy NASDAQ finished the month 2.3% lower. European shares were hit particularly hard with the Euro STOXX 50 index off by 8.0%. The 10-year U.S. Treasury yield surged 19 basis points to 0.87% - likely in anticipation of additional fiscal stimulus.
At the time of this writing, the U.S. presidential election remains uncertain, but a divided government appears to be the likely outcome. However, there is still a remote chance of Democrats gaining control of the Senate depending on the outcome of Senate races in Georgia. If runoffs occur in both races there, then those results would likely not come until January 2021. Thus far, equities have been rallying on the premise of less policy change, including corporate taxes.
Citi Private Bank’s Global Investment Committee (GIC) holds an overweight on global equities, particularly small- and mid-capitalization share globally. The Committee is also overweight investment grade corporate bonds and U.S. residential and commercial mortgage REITS.
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Regional Outlook
United States
Economy (Recovering)
The U.S. economy rebounded strongly in the third quarter – reversing a portion of the deep second quarter contraction, but not all of it. Despite registering an annualized growth rate of 33% in the third quarter, Citi’s economists believe that it will likely take until mid-2021 for economic activity to retain its fourth quarter 2019 levels. Additional fiscal stimulus from Congress should support growth, but the timing remains unclear given the U.S. presidential election.
Stocks (Neutral; Overweight SMID)
Citi Private Bank’s Global Investment Committee is neutral on U.S. large-cap stocks, but remains overweight U.S. small- and mid-cap shares (SMID). Significant stimulus from the Fed and U.S. congress have boosted markets after a significant drop in March. Broad market valuations are no longer cheap –even when pricing in recovery from the Covid-shock. However, this is largely a function of the powerful rally in information technology-related shares. While TMT (Tech, Media, Telecom) fundamentals are strong and improving, we see opportunities in Cyclicals sectors like Industrials, Financials, and REITS.
Bonds (Overweight)
The Federal Reserve is not expected to raise rates for a long time and could increase the duration of or the amount of asset purchases should the economy slow. With yields already quite low, Citi’s GIC is neutral on short- and intermediate-duration Treasuries. The Committee remains overweight investment grade corporate bonds and U.S. residential REITS and commercial mortgage REITS.
Europe and Japan
Economy (Europe: Recovering / Japan: Recovering)
Citi’s economists cut their 2020 Euro Area growth forecast by 0.6% to -7.3% and lowered their 2021 forecast by 1.2% to 4.4% to account for the resurgence of COVID-19 cases across the region. In Japan, Citi’s economists revised up their annual forecasts for 2020 and 2021 by 0.1% and 0.2% to -5.4% and 2.3%. The government’s “Go to Travel” campaign to support tourism seems like it will be extended into te summer or 2021 and could boost services consumption.
Stocks (Europe: Neutral; Overweight SMID / Japan: Neutral; Overweight SMID)
The GIC is neutral on both Europe and Japan large-caps, but overweight SMID. Large-cap stocks sold off along with global markets, but have rebounded sharply as a result of stimulus. This leaves the Committee neutral on large-cap. A better opportunity might be small- and mid-cap shares, which should catch up to large-cap shares as the global economic recovery continues.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Recovering)
The economic outlook for emerging markets looks better than many industrial economies with 2020 growth likely to fall by -2.3% (versus -5.3% for industrial countries) and rise by 6.1% in 2021. Citi’s economists revised down their forecast for year-on-year growth in China from 2.4% to 2.1%. They expect growth to improve to 8.2% in 2021.
Stocks (Overweight)
The GIC is overweight emerging markets (Asia and Latin America). Chinese shares pulled back in September, but after a strong run in the technology and internet sector. However, the GIC remains optimistic on Asian consumption, technology and healthcare themes. Latin America could perform well coming out of this crisis. However, we maintain a cautious stance longer-term.
Bonds (Overweight)
We are overweight emerging market fixed income as U.S. dollar-denominated debt valuations reflect poor fundamentals, but also long-term opportunities and attractive risk adjusted returns.
U.S. Stock Market and Economic Forecasts
| Indicator | 2018A | 2019A | 2020F |
|---|---|---|---|
| S&P 500 Target | 2,507 | 3,231 | 3,300 |
| S&P 500 P/E Ratio | 15.43x | 18.97x | 25.17x |
| S&P 500 EPS Growth | 22.5% | 2.0% | -20.1% |
| GDP (YoY) | 2.9% | 2.2% | -3.6% |
| Inflation (YoY) | 2.0% | 1.5% | 1.2% |
| Unemployment Rate | 3.9% | 3.7% | 8.2% |
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 | 2.6 | -4.0 | 5.1 | 2.5 | 2.0 | 2.2 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 3.0 | -3.7 | 5.5 | 3.2 | 2.8 | 3.1 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 1.6 | -5.3 | 4.3 | 1.3 | 0.7 | 1.3 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 2.2 | -3.6 | 4.9 | 1.5 | 1.2 | 1.8 | 1.92 | 1.25 | 1.25 | N/A | N/A | N/A |
| Japan | 0.7 | -5.4 | 2.3 | 0.5 | 0.1 | -0.3 | -0.10 | 0.04 | 0.05 | 109 | 107 | 107 |
| Euro Area | 1.3 | -7.3 | 4.4 | 1.2 | 0.3 | 0.9 | -0.25 | -0.44 | -0.33 | 1.12 | 1.15 | 1.22 |
| Emerging Markets | 3.8 | -2.3 | 6.1 | 3.9 | 3.6 | 3.3 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 6.1 | 2.1 | 8.2 | 2.9 | 2.7 | 1.7 | 2.99 | 2.72 | 2.90 | 6.91 | 6.91 | 6.56 |
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 | 551 | -4.3 | 5.6 | 21.6 | -11.2 | 24.0 | -2.5 | -2.5 | -2.5 | 27.1 | 21.9 | 2.1 |
| S&P 500 | 3270 | -0.7 | 9.5 | 19.4 | -6.2 | 28.9 | -2.8 | -2.8 | 1.2 | 26.2 | 24.4 | 1.8 |
| DJIA | 26502 | -2.2 | 13.4 | 25.1 | -5.6 | 22.3 | -4.6 | -4.6 | -7.1 | 22.5 | 22.7 | 2.2 |
| NASDAQ | 10912 | 5.7 | 7.5 | 28.2 | -3.9 | 35.2 | -2.3 | -2.3 | 21.6 | 60.8 | 36.2 | 0.8 |
| Europe | 2574 | 3.9 | 0.7 | 21.2 | -18.5 | 22.5 | -8.0 | -8.0 | -18.0 | 39.2 | 20.1 | 2.6 |
| Japan | 3295 | 9.1 | 0.4 | 21.8 | -14.5 | 17.1 | -1.6 | -1.6 | -4.1 | 27.4 | 21.1 | 2.2 |
| Emerging Markets | 1103 | -17.0 | 8.6 | 34.3 | -16.6 | 15.4 | 2.0 | 2.0 | -1.0 | 20.7 | 17.8 | 2.2 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 0.63 | 0.9 | 3.3 | 2.1 | 0.5 | 7.1 | 0.0 | 0.0 | 4.9 | 10-Yr. U.S. Treasury | 0.87 |
| U.S. | 1.16 | 0.5 | 2.7 | 3.6 | 0.0 | 8.9 | -0.5 | -0.5 | 6.4 | 30-Yr. U.S. Treasury | 1.66 |
| Europe | -0.08 | 1.1 | 3.3 | 0.5 | 0.5 | 6.0 | 0.8 | 0.8 | 3.7 | 1-Yr. CD Rate | 0.42 |
| EM Sovereign | 4.81 | 0.6 | 9.6 | 9.8 | -4.1 | 14.8 | -0.4 | -0.4 | -0.7 | 30-Yr. Fixed Mortgage | 3.06 |
| U.S. High Yield | 6.15 | -5.6 | 17.8 | 7.0 | -2.1 | 14.1 | 0.4 | 0.4 | 0.3 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
