Spooked in September

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Monthly Market Snapshot: September 2020

Highlights

Globally, stocks tumbled in September as investors sought clarity from Washington and reassessed the path of COVID-19. In the United States, the S&P 500 fell by 3.9% in the month, but still closed the third quarter 8.5% higher. The tech-heavy NASDAQ tumbled 5.2% in the month, but rose 11.0% during the quarter. On the upside, the monthly declines shook off some of the market’s froth. The 10-year U.S. Treasury yield fell 2 basis points to 0.68%.

After an extremely strong rally, U.S. stocks experienced a technical correction as investors trimmed technology positions. Looking ahead, rising uncertainty about the U.S. presidential election and path of COVID-19 during the winter months may keep investors from taking on additional risk. On the upside, there are few signs that the recovery is stalling.

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.

Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

Regional Outlook

United States

Economy (Recovering)

The U.S. economy continues to recover with recent data pointing towards an annualized growth rate of about 30% in the third quarter. This reverses a substantial portion, but not all, of the second quarter contraction. It will likely take until mid-2021 to real GDP to reach its fourth quarter 2019 level. Additional fiscal stimulus from Congress should help to support growth, but it is unclear if Congress will pass additional legislation before or after 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, which should keep rates “lower for longer,” but we could see rates rise a bit on announcement of a vaccine. 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 lifted their 2020 Euro Area growth forecast by 0.1% to -6.7%. However, their 2021 forecast has been lowered by 0.9% to 5.6% to account for the resurgence of COVID-19 cases across the region. In Japan, Prime Minister Yoshihide Suga took over the reins on September 16th. However, macroeconomic policy is likely to remain largely the same. Growth looks like it may fall by -5.5% in 2020 before rebounding by 2.1% in 2021.

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 -2.2% (versus -5.2% for industrial countries). Citi’s economists are forecasting 2.4% growth year-on-year for China in 2020 and 8.2% growth year-on-year in 2021. Growth momentum appears solid and stimulus has yet to fully materialize.

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

Figure 1: 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	25.71x
S&P 500 EPS Growth	22.5%	2.0%	-20.1%
GDP (YoY)	2.9%	2.3%	-3.6%
Inflation (YoY)	2.0%	1.4%	1.1%
Unemployment Rate	3.9%	3.7%	7.9%

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 September 23, 2020. 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
	2019F	2020F	2021F	2019F	2020F	2021F	2019F	2020F	2021F	2019F	2020F	2021F
Global	2.6	-3.7	5.4	2.5	1.9	2.3	N/A	N/A	N/A	N/A	N/A	N/A
Based on PPP Weights	3.0	-3.6	5.7	3.2	2.7	3.2	N/A	N/A	N/A	N/A	N/A	N/A
Industrial Countries	1.7	-5.2	4.8	1.3	0.7	1.5	N/A	N/A	N/A	N/A	N/A	N/A
United States	2.3	-3.6	5.1	1.5	1.1	2.0	1.75	1.25	1.25	N/A	N/A	N/A
Japan	0.7	-5.5	2.1	0.5	0.1	0.4	-0.10	0.03	0.05	109	107	107
Euro Area	1.3	-6.7	5.6	1.2	0.3	1.0	-0.25	-0.44	-0.30	1.12	1.15	1.22
Emerging Markets	3.8	-2.2	6.2	4.0	3.6	3.5	N/A	N/A	N/A	N/A	N/A	N/A
China	6.1	2.4	8.2	2.9	2.7	2.0	2.99	2.73	3.02	6.91	6.94	6.71

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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	2015	2016	2017	2018	2019	MTD	QTD	YTD	P/E	12-Month Forward P/E	Current
		Equity Returns (%)								Valuations		Div. Yld. (%)
Global	565	-4.3	5.6	21.6	-11.2	24.0	-3.4	11.4	0.0	27.4	22.8	2.1
S&P 500	3363	-0.7	9.5	19.4	-6.2	28.9	-3.9	8.5	4.1	26.1	21.5	1.8
DJIA	27782	-2.2	13.4	25.1	-5.6	22.3	-2.3	7.6	-2.7	23.9	23.8	2.2
NASDAQ	11168	5.7	7.5	28.2	-3.9	35.2	-5.2	11.1	24.5	65.5	36.3	0.9
Europe	2797	3.9	0.7	21.2	-18.5	22.5	-4.3	3.1	-10.9	37.3	21.3	2.5
Japan	3349	9.1	0.4	21.8	-14.5	17.1	0.3	6.2	-2.6	26.2	21.2	2.2
Emerging Markets	1082	-17.0	8.6	34.3	-16.6	15.4	-1.8	8.7	-2.9	20.1	17.6	2.3

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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	2015	2016	2017	2018	2019	MTD	QTD	YTD	Instrument	Current (%)
		Fixed Income Returns (%)								Other Key Rates
Global	0.62	0.9	3.3	2.1	0.5	7.1	0.4	0.8	4.9	10-Yr. U.S. Treasury	0.68
U.S.	1.08	0.5	2.7	3.6	0.0	8.9	0.0	0.6	6.9	30-Yr. U.S. Treasury	1.46
Europe	0.02	1.1	3.3	0.5	0.5	6.0	1.0	1.5	2.8	1-Yr. CD Rate	0.44
EM Sovereign	4.27	0.6	9.6	9.8	-4.1	14.8	-1.8	2.3	-0.4	30-Yr. Fixed Mortgage	3.08
U.S. High Yield	6.43	-5.6	17.8	7.0	-2.1	14.1	-1.1	4.9	-0.2	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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