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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.
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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
| 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% |
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 |
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 | 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 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2015 | 2016 | 2017 | 2018 | 2019 | MTD | QTD | YTD | Instrument | Current (%) |
| 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 |
Asset Class Returns (Sorted by Performance)
