Six Straight Months of S&P 500 Gains

Home › Market Commentary › Monthly Market Snapshot

Monthly Market Snapshot: July 2021

Highlights

Investors experienced building crosswinds in July, but continued to drive equity indices higher. One of those crosswinds was the Covid Delta variant, which causes some investors to question whether or not the ongoing recovery might start to weaken. We don’t see it as derailing the economic recovery, though it could delay recovery in some regions / sectors. Despite these fears, the S&P 500 added 2.3%. The clear underperformer during the month was emerging markets (down 7.0%) as Chinese stocks plunged amid a regulatory crackdown.

A bi-partisan agreement on a “hard” U.S. infrastructure bill appears to have been reached. However, the larger, social-spending infrastructure component may need to be passed via a party-line reconciliation bill this fall. A key question that remains is if it be largely deficit-financed or paid for by higher corporate and individual taxes. Fed policy remains in question as well with investors eagerly awaiting an official announcement about the tapering of Fed asset purchases.

Citi’s Global Investment Committee (GIC) left its allocation to equities and fixed income unchanged. However, the GIC made several changes within the portfolio’s composition, including upgrading large-cap U.S. and China stocks at the expense of other emerging markets and real estate. 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 6.5% in the second quarter. Although the print came in below expectations it was largely due to a drawdown in private inventories. Personal consumption was remarkably strong, coming in at an annualized rate of 11.8%. Solid consumption should enable the expansion to continue at an above-trend pace for the next few quarters. Fears about the Delta variant are warranted and could pose a downside risk to growth, but a return to the lockdowns experienced in 2020 seems highly unlikely.

Stocks (Overweight Large-Cap; Underweight SMID)

Citi’s Global Investment Committee (GIC) increased its allocation to U.S. large-cap stocks, but maintained 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. The GIC’s underweight in SMID comes 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. Although the 10-year U.S. Treasury yield has been on the decline for four straight months, we still think that the economic backdrop argues for higher rates over time. Perhaps the 10-year U.S. Treasury yield trade in the 1.5%-2.0% 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, another state of emergency declaration in Tokyo led to a slight downgrade to 2021 growth forecasts – from 2.3% to 2.2%. However, the 2022 growth forecast has been lifted from 3.5% to 3.8%.

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.

Bonds (Underweight)

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

Emerging Markets

Economy (Recovering)

Citi Research lowered its 2021 growth forecast from 6.8% to 6.7% slightly lower 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 ex China and China. The GIC 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 the trade and industrial rebound expected later this year. Latin America has been downgraded to neutral after the region’s largest market, Brazil, returned 63% in U.S. dollar terms since the GIC added it as an overweight in April 2020.

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	23.74x
S&P 500 EPS Growth	2.0%	-13.5%	29.2%
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 July 29, 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	5.9	4.2	2.0	3.0	2.7	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	6.4	3.3	1.2	3.4	2.5	0.91	2.00	2.00	N/A	N/A	N/A
Japan	-4.7	2.2	3.8	0.0	0.0	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

❮ Swipe left for more

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	724	5.6	21.6	-11.2	41.8	14.3	0.6	0.6	12.1	24.7	19.0	1.7
S&P 500	4395	9.5	19.4	-6.2	49.8	16.3	2.3	2.3	17.0	27.6	22.3	1.3
DJIA	34935	13.4	25.1	-5.6	31.2	7.2	1.3	1.3	14.1	21.5	19.3	1.7
NASDAQ	14673	7.5	28.2	-3.9	94.2	43.6	1.2	1.2	13.8	97.3	32.7	0.6
Europe	3622	0.7	21.2	-18.5	26.7	3.4	0.6	0.6	11.6	25.5	17.9	2.1
Japan	3819	0.4	21.8	-14.5	31.3	12.2	-1.3	-1.3	-0.9	18.1	15.6	2.0
Emerging Markets	1278	8.6	34.3	-16.6	33.7	15.8	-7.0	-1.0	-1.0	17.9	13.4	2.2

❮ Swipe left for more

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	0.76	3.3	2.1	0.5	7.1	5.7	1.2	1.2	-0.7	10-Yr. U.S. Treasury	1.22
U.S.	1.34	2.7	3.6	0.0	8.9	7.7	1.1	1.1	-0.5	30-Yr. U.S. Treasury	1.89
Europe	-0.07	3.3	0.5	0.5	6.0	4.1	1.6	1.6	-0.7	1-Yr. CD Rate	0.29
EM Sovereign	4.52	9.6	9.8	-4.1	14.8	5.4	0.5	0.5	-1.2	30-Yr. Fixed Mortgage	2.98
U.S. High Yield	4.68	17.8	7.0	-2.1	14.1	6.3	0.3	0.3	4.0	Prime Rate	3.25

❮ Swipe left for more

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)

Explore Citi Benefits

Market Insights are only one of the many benefits you get as a client.

Personalized Financial Guidance

Collaborate with your dedicated team to create a personalized financial plan around your life’s “what ifs” using Citi Wealth Advisor, Citi Personal Wealth Management’s digital financial planning solution.

Learn More on Personalized Financial Guidance
Ways to Invest

Citi offers a range of investment and insurance products and services that can help you work toward your financial goals. These products include individual stocks, fixed income and mutual funds, as well as more sophisticated offerings like alternative investments and structured products.

Learn More on Ways to Invest
World-class Investment Capabilities

Gain access to Citi Personal Wealth Management’s world-class investment platform, including a breadth of product choices and research from hundreds of analysts globally.

Learn More on World-class Investment Capabilities

Important Information for You to Know About Our Business and Relationship With You

We are required to deliver two important disclosure documents about our business and relationship with you:

Form Client Relationship Summary ("Form CRS") is a brief summary of the brokerage and advisory services we offer.
Regulation Best Interest Disclosure Statement and Related Information for Retirement Accounts is a more detailed description of the brokerage services we offer and our obligations under Regulation Best Interest when we make recommendations to you as your broker-dealer.

Please review both of these important documents online at http://www.citi.com/investorinfo/. If you prefer paper copies, Please contact your advisor or call us at (800) 846-5200 | TTY: Use 711.

Highlights

Regional Outlook

U.S. Stock Market and Economic Forecasts

Global Economic Forecasts

Market Indicators

Asset Class Returns (Sorted by Performance)

Watch Video

Answers to Commonly Asked Questions on Taxes and Estate Planning (59:58)