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Monthly Market Snapshot: December 2021
Highlights
Global equity markets finished the year 16.8% higher with U.S. stocks leading the way with a 26.9% gain. Emerging market equities were the notable laggard – closing the year 4.6% lower. The year presented several challenges including surging inflation, supply bottlenecks, rising interest rates, continued spread of Covid, and a pivoting U.S. central bank, but corporate profits surged with S&P 500 earnings-per-share rising by 47.3%. Following the jump in profits, U.S. stocks are now cheaper than one year ago with the S&P 500 price-to-earnings ratio falling from 29.7x earnings to 26.3x earnings.
The Omicron variant of the COVID-19 virus continues to cloud the outlook, but its economic impact is likely to be transitory. It will likely take a couple of months to discover the depth of its impact, but it is important to remember that we have learned to fight back through vaccines and social-distancing protocols and each new wave seems to lead to less market reaction. Equity market performance in the year ahead will more likely be driven by further normalization in economic activity and global central bank policy.
Citi’s Global Investment Committee (GIC) maintains a +6.0% overweight on Global Equities with half of the overweight invested in Global Healthcare and a -6.0% underweight on its Fixed Income and Cash allocation.
Citi Personal Wealth Management
Regional Outlook
United States
Economy (Expanding)
The U.S. economy appears to be on track to grow by more than 5.0% in the fourth quarter of 2021 with holiday sales suggesting still solid consumer demand. However, growth may weaken some in the first quarter of 2022 as the spread of Omicron weighs on economic activity. For the full year, Citi Global Wealth Investment expects growth to remain above-trend at 3.5% and for inflation to moderate to below 3.0%. With economy activity likely to remain robust, we expect the Fed to hike interest rates several times in 2022.
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. While the market appears to be less reactive to Covid news, the potential for Federal Reserve rate hikes and upcoming mid-term elections could be market-moving later this year. However, we think that the longer-term driver of markets will be corporate profits, which we expect to outpace inflation. This sets the potential for modest gains in 2022. The GIC favors higher quality stocks like dividend growers, healthcare, and consumer staples.
Bonds (Overweight)
The GIC maintains a deep underweight on both European and Japanese sovereign bonds. The GIC is underweight short-term U.S. Treasuries, overweight intermediate-duration U.S. Treasuries, and neutral on long-dated Treasuries. We are overweight U.S. Treasury-Inflation-Protected Securities (TIPS). Despite numerous calls for higher rates, the 10-year U.S. Treasury yield closed out the year at just 1.51% as Omicron fears suppressed yields. Munis are attractive for U.S. investors.
Europe and Japan
Economy (Europe: Expanding / Japan: Recovering)
Eurozone growth will likely fade some throughout the year, but we expect supply constraints to ease some in spring which should leave growth still above-trend. Citi Global Wealth Investments is forecasting growth in the European Union to fall from about 4.8% in 2021 to 3.9% in 2022. In Japan, growth looks likely to rise with Citi Research’s economists looking for 1.7% in 2021 and 2.9% in 2022 as the region was later to reopen relative to other developed economies.
Stocks (UK: Overweight; Europe ex UK: Neutral; SMID: Neutral / Japan: Neutral)
The GIC maintains an overweight on UK equities but is neutral on both Europe ex UK and Japan large-caps. Non-U.S. small- and mid-cap stocks (SMID) are also considered a neutral. In the UK, valuations remain cheap, and the FTSE 100 is largely comprised of value-oriented names. In broader Europe, the potential for social-distancing protocols as Omicron spreads and exporters’ potential exposure to a slowdown in China leave us neutral on the region. In Japan, stocks that benefit from global trends like digitization may outperform, but we remain neutral on the region.
Bonds (Underweight)
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Emerging Markets
Economy (Recovering)
Citi Research’s growth forecast for emerging markets remains at 6.6% year-on-year in 2021 and at 4.6% year-on-year in 2022. However, concerns are rising that China’s economy could slow in coming quarters with growth expected to slip from 8.1% in 2021 to 4.9% in 2022.
Stocks (Overweight Asia ex-China and China; Neutral Latin America; Underweight EMEA)
The GIC is overweight on both Emerging Market Asia ex China and China. However, we are neutral on Latin America and underweight Emerging Europe, Middle East, and Africa (EMEA) as emerging market stocks are facing a “double-whammy” of tighter Fed policy and slower growth in China.
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
| Indicator | 2020A | 2021F | 2022F |
|---|---|---|---|
| S&P 500 Target | 3,300 | 4,600 | 4,900 |
| S&P 500 P/E Ratio | 27.43x | 23.5x | 21.67x |
| S&P 500 EPS Growth | -13.5% | 43.1% | 8.3% |
| GDP (YoY) | -3.4% | 5.6% | 4.0% |
| Inflation (YoY) | 1.2% | 3.6% | 2.7% |
| Unemployment Rate | 8.1% | 5.4% | 3.9% |
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.
Note 3: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.
Global Economic Forecasts
| Region | GDP Growth | CPI Inflation | 10-Year Yields | Exchange Rate vs. USD | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021F | 2022F | 2023F | 2021F | 2022F | 2023F | 2021F | 2022F | 2023F | 2021F | 2022F | 2023F | |
| Global | 5.6 | 4.2 | 3.1 | 3.2 | 3.4 | 2.6 | N/A | N/A | N/A | N/A | N/A | N/A |
| Based on PPP Weights | 6.0 | 4.4 | 3.5 | 4.2 | 4.2 | 3.5 | N/A | N/A | N/A | N/A | N/A | N/A |
| Industrial Countries | 4.9 | 3.9 | 2.2 | 2.7 | 2.7 | 1.7 | N/A | N/A | N/A | N/A | N/A | N/A |
| United States | 5.5 | 4.0 | 1.8 | 3.6 | 2.7 | 2.0 | 1.51 | 2.25 | 2.25 | N/A | N/A | N/A |
| Japan | 1.7 | 2.9 | 1.4 | -0.2 | 1.0 | 0.7 | 0.07 | 0.15 | 0.15 | 112 | 115 | 113 |
| Euro Area | 5.1 | 3.9 | 3.0 | 2.5 | 2.8 | 1.5 | -0.30 | -0.11 | 0.16 | 1.16 | 1.12 | 1.12 |
| Emerging Markets | 6.6 | 4.5 | 4.2 | 3.8 | 4.3 | 3.8 | N/A | N/A | N/A | N/A | N/A | N/A |
| China | 8.1 | 4.7 | 4.8 | 0.8 | 2.0 | 2.4 | 3.02 | 2.89 | 3.00 | 6.45 | 6.28 | 5.77 |
Market Indicators
| Equity Returns (%) | Valuations | Div. Yld. (%) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equities | Level | 2016 | 2017 | 2018 | 2019 | 2020 | MTD | QTD | YTD | P/E | 12-Month Forward P/E |
Current |
| Global | 755 | 5.6 | 21.6 | -11.2 | 41.8 | 14.3 | 3.9 | 6.4 | 16.8 | 21.6 | 19.0 | 1.8 |
| S&P 500 | 4766 | 9.5 | 19.4 | -6.2 | 49.8 | 16.3 | 4.4 | 10.6 | 26.9 | 26.3 | 22.9 | 1.3 |
| DJIA | 36338 | 13.4 | 25.1 | -5.6 | 31.2 | 7.2 | 5.4 | 7.4 | 18.7 | 20.3 | 18.7 | 1.7 |
| NASDAQ | 15645 | 7.5 | 28.2 | -3.9 | 94.2 | 43.6 | 0.7 | 8.3 | 21.4 | 131.3 | 35.0 | 0.6 |
| Europe | 3651 | 0.7 | 21.2 | -18.5 | 26.7 | 3.4 | 6.9 | 4.2 | 12.5 | 19.2 | 16.6 | 2.4 |
| Japan | 3851 | 0.4 | 21.8 | -14.5 | 31.3 | 12.2 | 1.8 | -4.1 | -0.1 | 15.1 | 14.9 | 2.1 |
| Emerging Markets | 1232 | 8.6 | 34.3 | -16.6 | 33.7 | 15.8 | 1.6 | -1.7 | -4.6 | 14.0 | 12.4 | 2.4 |
| Fixed Income Returns (%) | Other Key Rates | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Income | YTM | 2016 | 2017 | 2018 | 2019 | 2020 | MTD | QTD | YTD | Instrument | Current (%) |
| Global | 1.12 | 3.3 | 2.1 | 0.5 | 7.1 | 5.7 | -0.6 | -0.1 | -2.1 | 10-Yr. U.S. Treasury | 1.51 |
| U.S. | 1.74 | 2.7 | 3.6 | 0.0 | 8.9 | 7.7 | -0.3 | 0.0 | -1.6 | 30-Yr. U.S. Treasury | 1.90 |
| Europe | 0.22 | 3.3 | 0.5 | 0.5 | 6.0 | 4.1 | -1.2 | -0.6 | -2.9 | 1-Yr. CD Rate | 0.28 |
| EM Sovereign | 5.11 | 9.6 | 9.8 | -4.1 | 14.8 | 5.4 | 1.8 | -0.2 | -2.8 | 30-Yr. Fixed Mortgage | 3.27 |
| U.S. High Yield | 4.93 | 17.8 | 7.0 | -2.1 | 14.1 | 6.3 | 2.0 | 0.7 | 5.4 | Prime Rate | 3.25 |
Asset Class Returns (Sorted by Performance)
Note 1: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.
Note 1: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.