Seven Straight Months of S&P 500 Gains

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Monthly Market Snapshot: August 2021

Highlights

Despite investors’ concerns that a market correction may be nearing, the S&P 500 delivered its seventh straight month of consecutive gains in August. The wall of worry continues to be climbed. Even emerging markets, which suffered a 6.4% pullback mid-month, managed to close out the month 0.6% higher. Excluding China, emerging markets rose 2.5% in August. The 10 year U.S. Treasury yield rose modestly from 1.22% to 1.30%.

The Fed’s virtual Jackson Hole policy retreat drew lots of attention, but did not change the narrative much. The consensus still expects a tapering announcement to occur in the next meeting or two and for tapering to start by the end of 2021. The August employment report is due later this week and may hold the key on whether or not the tapering announcement comes in September. However, Chair Powell’s statement that, “We have much ground to cover to reach maximum employment,” suggests that policy will remain accommodative for some time and the first rate hike is likely at least a year away. Probably more.

Citi’s Global Investment Committee (GIC) left its allocation to Global Equities at a 8% overweight with a concentration in Global Healthcare and Fixed Income and Cash is a 8% underweight. The GIC recommends holding 10% of medium-risk portfolios in stocks with consistent dividend growth.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

The U.S. economy expanded by an annualized rate of 6.6% in the second quarter, but is tracking closer to 5.1% for the third quarter according to the Atlanta Fed. This suggests that the economy may be starting to normalize after the initial reopening surge. As a result, Citi Research’s economists have lowered their 2021 forecast from 6.4% year-on-year to 6.0% year-on-year. Inflation remains elevated, but we expect peak inflation to be reached shortly with consumer price index inflation averaging 3.8% in 2021. Infrastructure talks continue to progress with two separate bills likely to be passed later this year.

Stocks (Overweight Large-Cap; Underweight SMID)

Citi’s Global Investment Committee (GIC) remains overweight on U.S. large-cap stocks, but maintains an underweight on small- and middle-cap (SMID) stocks. The GIC thinks U.S. large-caps show sustainable growth opportunities even at a higher-than-average valuations, but U.S. small-caps tend to underperform as the business cycle matures. That leaves the GIC underweight in SMID after holding it as an overweight during the majority of the past 16 months.

Bonds (Neutral)

The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, and overweight U.S. Treasury-Inflation-Protected Securities (TIPS). Later this year, we expect to hear from the Fed that they intend to taper asset purchases. The 10-year U.S. Treasury yield appears to have stabilized after four straight month of declines. With tapering on deck, we think that the 10-year yield may climb to trade in a range of 1.50% to 2.00% by year-end. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.

Europe and Japan

Economy (Europe: Recovering / Japan: Recovering)

As the region’s vaccination campaign continues at a steady pace alongside ample fiscal and monetary policy, we expect to see a resurgence in economic activity in the second half of this year. Citi Research is looking for the euro area to expand by 4.6% in 2021 and by 4.5% in 2022. In Japan, 2021 growth forecasts have been revised down slightly – from 2.2% to 2.1%. However, the 2022 growth forecast has been lifted from 3.8% to 3.9%.

Stocks (Europe: Overweight; Neutral SMID / Japan: Neutral)

The GIC maintains an overweight on UK equities, but is neutral Europe ex UK. The GIC is also neutral on Japan large-caps. Non-U.S. small- and mid-cap stocks (SMID) are considered a neutral or slight underweight as well. In the UK, valuations remain cheap and the FTSE 100 is largely comprised of value-oriented Energy and Financial names, which we think can recover further if rates eventually rise.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

Citi Research’s 2021 growth forecast for emerging markets is 6.7%. This is slightly lower than the expectations for Asia, which is expected to grow 7.7% in 2021. Latin America is expected to grow by 5.9% in 2021 and by 2.6% in 2022.

Stocks (Overweight Asia (ex China) and China; Neutral Latin America; Underweight EMEA)

The GIC is overweight on emerging market Asia as it recently upgraded its allocation to China as the correction in Chinese tech shares have made valuations look attractive again. More broadly, Asian economies are positioned well for an industrial rebound expected later this year. Latin America remains at a neutral weighting.

Bonds (Overweight Asia; Neutral EMEA and Latin America)

The GIC maintains an overweight on emerging market fixed income, specifically Asia. 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	2020A	2021F
S&P 500 Target	3,231	3,300	4,000
S&P 500 P/E Ratio	18.97x	27.43x	24.52x
S&P 500 EPS Growth	2.0%	-13.5%	39.1%
GDP (YoY)	2.2%	-3.5%	6.4%
Inflation (YoY)	1.5%	1.2%	3.4%
Unemployment Rate	3.7%	8.1%	5.3%

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 August 31, 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
	2020A	2021F	2022F	2020A	2021F	2022F	2020A	2021F	2022F	2020A	2021F	2022F
Global	-3.5	5.8	4.3	2.0	3.1	2.8	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	-3.3	6.2	4.3	2.8	4.2	3.4	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	-4.9	5.3	3.8	0.7	2.4	2.0	N/A	N/A	N/A	N/A	N/A	N/A
United States	-3.5	6.0	3.6	1.2	3.4	2.7	0.91	2.00	2.00	N/A	N/A	N/A
Japan	-4.7	2.1	3.9	0.0	0.2	0.6	0.03	0.08	0.15	107	111	112
Euro Area	-6.7	4.6	4.5	0.3	2.0	1.6	-0.52	-0.22	-0.03	1.14	1.18	1.16
Emerging Markets	-1.7	6.7	4.7	3.6	3.8	3.7	N/A	N/A	N/A	N/A	N/A	N/A
China	2.3	8.7	5.5	2.5	1.2	2.2	2.96	3.04	2.85	6.90	6.43	6.10

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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	741	5.6	21.6	-11.2	41.8	14.3	2.3	2.9	14.6	22.9	19.1	1.7
S&P 500	4523	9.5	19.4	-6.2	49.8	16.3	2.9	5.2	20.4	27.1	22.4	1.3
DJIA	35361	13.4	25.1	-5.6	31.2	7.2	1.2	2.5	15.5	21.4	19.2	1.7
NASDAQ	15259	7.5	28.2	-3.9	94.2	43.6	4.0	5.2	18.4	132.7	33.4	0.6
Europe	3700	0.7	21.2	-18.5	26.7	3.4	2.2	2.8	14.0	22.7	17.7	2.1
Japan	3935	0.4	21.8	-14.5	31.3	12.2	3.0	1.7	2.1	16.1	15.1	2.0
Emerging Markets	1285	8.6	34.3	-16.6	33.7	15.8	0.6	-6.5	-0.5	16.2	13.4	2.2

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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	0.77	3.3	2.1	0.5	7.1	5.7	-0.1	1.2	-0.7	10-Yr. U.S. Treasury	1.31
U.S.	1.35	2.7	3.6	0.0	8.9	7.7	-0.1	1.0	-0.6	30-Yr. U.S. Treasury	1.93
Europe	-0.04	3.3	0.5	0.5	6.0	4.1	-0.1	1.5	-0.8	1-Yr. CD Rate	0.29
EM Sovereign	4.47	9.6	9.8	-4.1	14.8	5.4	1.0	1.5	-0.2	30-Yr. Fixed Mortgage	3.03
U.S. High Yield	4.69	17.8	7.0	-2.1	14.1	6.3	0.5	0.8	4.5	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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