Rates March Higher

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Monthly Market Snapshot: March 2021

Highlights

Long-duration interest rates in the U.S. continued to climb higher in March. In the United States, the Dow Jones jumped 6.6% as confidence in the economic outlook gained steam. The S&P 500 rose 4.2% while the tech-heavy and interest-rate sensitive NASDAQ continued to lag with a 0.4% gain as the yield curve steepened. The nominal 10-year U.S. Treasury yield rose rapidly from 1.40% to 1.74% by month end.

The Federal Reserve seems satisfied with its current policy stance and is waiting to see actual economic data before changing its stance. However, financial markets will not wait for actual data to price in rising growth and inflation expectations. Technology shares have been sensitive to the rise in real yields as the space is often considered a long-duration asset. While Covid jitters have caused the rotation into Value stocks to pause some, we think the rotation has further room to run.

Citi Private Bank’s Global Investment Committee (GIC) made several asset allocation changes. The GIC decided to slightly increase its overweight to both UK stocks and U.S. Treasury-Inflation-Protected Securities (or TIPS). Gold was moved from an overweight to a neutral.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

Citi’s economists expect activity to rebound to pre-COVID levels in the next couple of quarters with the unemployment rate falling to 4.4% by year-end. Though the path of the economy is highly dependent on the path of the virus and that poses some risk to optimistic views. The $1.9 trillion fiscal stimulus package is likely first of several initiatives. The Biden Administration will likely have solidified its plan to change the tax code and implement an infrastructure plan towards the end of the year. We envision higher inflation prints ahead, but think that inflation will moderate some in 2022.

Stocks (Neutral)

Citi Private Bank’s Global Investment Committee is neutral on U.S. stocks. After putting in place an overweight on small- and mid-cap shares (SMID) back in April 2020, the Committee moved back to a neutral in January after the asset class nearly doubled. Stimulus from the Fed and U.S. congress will provide continued economic support, but valuations appear full. We think that the rotation into Value stocks likely has further room to run, but Growth stocks will likely remain attractive over the longer-run. Cyclical sectors like Industrials, Energy, Financials, and REITS should benefit from the recovery.

Bonds (Underweight)

The GIC is underweight short-term U.S. Treasuries and neutral intermediate- and long-dated Treasuries. The Committee decided to increase its overweight to US Treasury-Inflation-Protected Securities (TIPS). Overall, we expect rates to trend higher on a 2021 cyclical recovery and higher U.S. debt burdens with the 10-year Treasury yield reaching 2.5% in coming years. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.

Europe and Japan

Economy (Europe: Contracting / Japan: Recovering)

Citi’s economists expect a negative real GDP print for the Euro Area in the first quarter. However, vaccinations should allow for more robust activity in following three quarters. As a result, the 2021 GDP forecast has been revised up 0.4% to 4.0%. In Japan, Citi’s economists revised up their 2021 forecasts by 0.1% to 1.9%. Herd immunity could possibly be reached in early 2022 and lead to even stronger growth then (currently penciled in at 2.8%).

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). At its March meeting, the Committee added further to UK equities with valuations much more reasonable than the U.S. The region also has a noticeable exposure to energy and financial companies, which should benefit from higher yields. Technology stocks, on the other hand, account for just about a 1.3% weight in the FTSE 100.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

Citi expects emerging market economies to rebound from -1.7% growth to 6.4% growth in 2021. The Asian region is expected to grow by 7.6% in 2021 while Latin America is expected to grow by 4.5%.

Stocks (Overweight)

The GIC is overweight emerging markets (Asia and Latin America), but moved to a neutral on China as shares have already climbed significantly. Regions like Latin America may play catch up as shares have severely underperformed relative to other markets. The longer-term outlook looks more cautious.

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

Figure 1: 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	27.43x	22.96x
S&P 500 EPS Growth	2.0%	-13.3%	21.2%
GDP (YoY)	2.2%	-3.5%	6.1%
Inflation (YoY)	1.5%	1.2%	2.6%
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 March 17, 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
	2020F	2021F	2022F	2020F	2021F	2022F	2020F	2021F	2022F	2020F	2021F	2022F
Global	-3.6	5.5	4.0	2.0	2.5	2.4	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	-3.3	6.0	4.1	2.8	3.5	3.2	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	-5.0	4.9	3.5	0.7	1.9	1.6	N/A	N/A	N/A	N/A	N/A	N/A
United States	-3.5	6.1	3.2	1.2	2.6	2.0	0.91	1.45	1.45	N/A	N/A	N/A
Japan	-4.8	1.9	2.8	0.0	-0.1	0.4	0.03	0.09	0.10	107	107	109
Euro Area	-6.8	3.6	4.3	0.3	1.4	1.2	-0.52	-0.40	-0.09	1.14	1.19	1.16
Emerging Markets	-1.7	6.3	4.6	3.6	3.4	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	3.30	3.25	6.90	6.34	5.91

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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	673	5.6	21.6	-11.2	41.8	14.3	2.5	4.2	4.2	32.4	20.3	1.7
S&P 500	3973	9.5	19.4	-6.2	49.8	16.3	4.2	5.8	5.8	32.7	23.2	1.4
DJIA	32982	13.4	25.1	-5.6	31.2	7.2	6.6	7.8	7.8	29.6	21.4	1.8
NASDAQ	13247	7.5	28.2	-3.9	94.2	43.6	0.4	2.8	2.8	72.6	33.6	0.7
Europe	3440	0.7	21.2	-18.5	26.7	3.4	4.4	6.0	6.0	56.3	19.1	2.0
Japan	3886	0.4	21.8	-14.5	31.3	12.2	0.3	0.8	0.8	28.8	20.7	1.8
Emerging Markets	1316	8.6	34.3	-16.6	33.7	15.8	-1.7	1.9	1.9	23.7	15.6	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	0.53	3.3	2.1	0.5	7.1	5.7	-0.4	-2.8	-2.8	10-Yr. U.S. Treasury	1.74
U.S.	1.01	2.7	3.6	0.0	8.9	7.7	-1.1	-3.5	-3.5	30-Yr. U.S. Treasury	2.41
Europe	-0.13	3.3	0.5	0.5	6.0	4.1	0.1	-1.9	-1.9	1-Yr. CD Rate	0.33
EM Sovereign	4.16	9.6	9.8	-4.1	14.8	5.4	-1.8	-6.0	-6.0	30-Yr. Fixed Mortgage	3.27
U.S. High Yield	5.05	17.8	7.0	-2.1	14.1	6.3	0.3	0.9	0.9	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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