The global equity market pulled back a bit with the MSCI World Index falling 0.6% as
investors digested negative corporate commentary. In the United States, the tech-heavy
NASDAQ slipped 1.0% as U.S. Treasury yields moved higher as growth metrics showed economic
resilience. The S&P 500 lost 1.2% while the Dow Jones retreated 0.6%. Though it is worth noting
that
the S&P 500 is now 5.3% higher than its May 19th low. The nominal 10-year U.S. Treasury yield
surged
19-basis-points from 2.74% to 2.93% by week-end.
Recent market commentary from corporate leaders likely tell us less about the future and
more about today. It is natural to look to notable leaders for guidance, but the
complexity of today’s backdrop suggests that it will probably be “time that tells” and not one
or two charismatic Chief Executive Officers. The reality is that post-pandemic supply and demand
must rebalance and that will take time.
The S&P 500 may have bottomed on May 19th, but we still think it’s too early to take
an
aggressive risk-on stance with positive economic data acting as a double-edged sword that
greenlights the Fed to continue upon its path of tighter monetary policy. We will
feel more comfortable about the prospects of a soft landing if the Fed eventually adopts a more
patient stance heading into 2023.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa
stock market indices
S&P 5004,109
(-1.2%index down 1.2% from
last week)
DJIAdow jones industrial average32,900
(-0.9%index down 0.9%
percent from last week)
NASDAQ12,013
(-1.0%index down 1.0%
percent from last week)
Mixed Messages
Let us start by saying that we are not anti-media. We believe that journalists provide the public
critical information and serve an important role in holding both elected and corporate leaders
accountable. That said, with investor uncertainty running high, commentary about the economic
outlook is naturally getting more attention and occasionally creating dramatic headlines that are
sometimes out of context. The following are primary examples:
The Chief Executive Officer (CEO) of a major electric vehicle company said that he “has a super
bad feeling” about the economy and that the company will be reducing headcount and then he
walked back those comments and stated that total headcount will actually rise
A CEO of a major U.S. bank said that the country is facing an “economic hurricane,” but that is
unclear if it the hurricane will dissipate or end up being like Superstorm Sandy
The Fed Vice Chair said that “it is hard to make the case for a pause (in raising rates),” but
followed up that beyond the next two Fed meetings “it is a bit difficult to say.”
Each of these comments moved markets but none of them are definitive statements. Instead, they
suggest that both corporate leaders and policymakers are uncertain about the economic outlook and
lack conviction. That simply mirrors the action we have seen in financial markets year-to-date with
the stock market being an official leading economic indicator (see figure 1). In fact, investor
sentiment has improved of late, not worsened, as those comments might imply (see figure 2).
Figure 1. News Economic Sentiment Index vs. S&P 500 (Year-on-Year
Percent Change)
This chart shows the News Economic Sentiment Index vs. S&P 500 year-on-year percent
change from June 2019 to June 2022 year-to-date.
Sources: Bloomberg and Citi Global Wealth Investments as of May 30, 2022. 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. Index returns do not include any
expenses, fees or sales charges, which would lower performance. Past performance is not a
guarantee of future results.
Figure 2. American Association of Individual Investors’ Investment
Sentiment Index (% Bearish)
This line chart shows American Association of Individual Investors’ Investment Sentiment
Index in percent bearish from June 2020 to June 2022 year-to-date.
Sources: Haver Analytics and Citi Global Wealth Investments as of June 1, 2022.
We suspect that the recent uptick in investor sentiment (though still far from bullish) is
reflecting initial signs that the U.S. economy is proving resilient. Not only did the May employment
report show the economy adding 390,000 jobs, but the monthly ISM manufacturing and service sector
business surveys showed the economy remaining solidly in expansion territory. While the economy has
been showing clear signs of slowing after an economic boom in 2021, most economic signposts continue
to point to an economy that is expanding at a rate of about 2.0% year-on-year (see figure 3). Yes,
consumers are starting to feel the bite from inflation, weaker equity markets, and higher mortgage
rates, but investors should not overlook the starting point with households’ cash levels as a
percentage of disposable personal income rising from a pre-pandemic level of 323% to 397% by the
fourth quarter of 2021 (cash levels rose $4.8 trillion in the United States during that period, see
figure 4).
Figure 3. ISM Manufacturing New Orders Index vs. Real Gross Domestic
Product (YoY%)
This line chart shows ISM Manufacturing New Orders Index vs. Real Gross Domestic Product
in percent year-on-year from 2006 to 2023.
Sources: Haver Analytics and Citi Global Wealth Investments as of May 2022. Note: An ISM
reading above 50 is thought to be consistent with economic expansion; a reading below if
thought to be consistent with contraction.
Figure 4. U.S. Household Cash Deposits as a % of Disposable Personal
Income
This line chart shows U.S. Household Cash Deposits as a percent of Disposable Personal
Income from 1959 to 2023.
Sources: Haver Analytics and Citi Global Wealth Investments as of 4Q 2021. Note: Deposits
includes foreign deposits, checkable deposits and currency, time and savings deposits, and
money market fund shares.
The path from here will depend on several factors like the war between Russia and Ukraine, crude oil
prices, and the Federal Reserve, but what we are really witnessing is the supply-side and
demand-side of the global economy trying to find a new equilibrium post-pandemic. On the
supply-side, we need to see an easing of supply chain pressures. With the war limiting Ukraine’s
ability to ship agricultural goods from its ports and China’s COVID restrictions holding back
exports, it is unsurprising to see supply chain pressures still elevated. However, we do find it
encouraging that things have not materially worsened (see figure 5). Should there be some resolution
in Ukraine or a more permanent relaxation of COVID restrictions in China, then the odds of a soft
landing might rise as inflationary pressures ease in the back half of 2022 (though we should
acknowledge a potential inflationary offset from rising commodity prices should China’s economy
reopen more fully).
Figure 5. Citi’s Global Supply Chain Pressures Index (Standard
Deviations)
This line chart shows the standard deviations of Citi's Global Supply Chain Pressures
Index from 2019 to 2022 year-to-date.
Sources: Bloomberg and Citi Global Wealth Investments as of May 30, 2022. Note: Citi’s
Global Supply Chain Pressures Index uses measures of container shipping costs from China to
the U.S. West Coast and also from China to Europe. It also uses the Baltic Dry index, which
captures the cost of shipping bulk commodities and the Baltic Air Freight index, which
captures air transport costs. The final variable is the Brent oil price, as its upsurge in
2021 seems to have contributed meaningfully to rising shipping costs and supply-chain
pressures.
On the demand-side, the Atlanta Fed’s real GDP tracker shows the economy expanding at about 1.3% in
the current quarter with consumer spending potentially contributing about 3 percentage points to
real GDP while changes in private inventories potentially subtracts 1.5 percentage points. Though we
suspect that as time progresses, consumer demand may slow further. This could cause investors to
become less focused on more backward-looking inflation data and more attentive to growth metrics as
the year progresses. While resilient economic data are encouraging, we still see it as a
double-edged sword that greenlights the Fed. Given that backdrop, we find it hard to justify an
overly bullish view on equities at this stage.
We would like to see some signs that the Fed has the patience to allow a more natural rebalancing of
supply and demand before taking on a much more aggressive stance on risk assets. Even if the S&P
500
did bottom on May 19th, we still think it is best to maintain a defensive tilt with a focus on
stocks of quality companies with stable earnings growth and strong balance sheets and on fixed
incomes assets that now have materially higher yields. While the odds of a soft landing may have
increased ever so slightly over the past month, we still think it will take some time for
post-pandemic supply and demand to find a more stable equilibrium.
What Should U.S. Investors Watch in the Week Ahead?
The big day to watch will likely be Friday when the Bureau of Labor Statistics will release the May
consumer price index (or CPI) reading. The consensus is calling for headline inflation to slow from
8.3% to 8.2% year-on-year.
Market
Indicators
Figure 6: U.S. Stock Market Returns and
Select Assets
Index
Weekly Chg change in percent
YTDyear to date change in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Dow Jones
-0.9%
-9.5%
-4.9%
2.0%
S&P 500
-1.2%
-13.8%
-2.0%
1.5%
NASDAQ
-1.0%
-23.2%
-11.8%
0.8%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change in percent
Level
10-Year Treasury Yield (%)
19.5 bps
142.3 bps
130 bps
2.93%
Gold ($/Oz.)
-0.1%
1.2%
-1.0%
$1,851.2
Oil ($/bbl)
3.3%
54.4%
72.8%
$118.87
❮ Swipe left for more
This table shows returns for various USA equity markets and select assets, in weekly,
year-to-date and 12 month changes.
Strong corporate earnings are bolstering the equity market.
Figure 7: International Stock Market
Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months
Div. Yield division yield in percent
Global
-0.6%
-14.0%
-8.7%
2.2%
Europe
-0.7%
-14.2%
-12.9%
3.4%
Japan
-0.3%
-14.8%
-16.5%
2.4%
Emerging Markets
1.8%
-13.1%
-21.5%
2.8%
❮ Swipe left for more
This table shows the US Stock Market Returns and Select Assets and International Stock
Market Returns
Sources: Bloomberg and Citi U.S. Wealth Management as of June 3, 2022. Note 1 (Equities): Global
= MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan (USD);
Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are based in
U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending on the
effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy ounce;
Oil = West Texas Intermediate crude at Cushing, OK. 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 not indicative of future
returns. Real results may vary.
The
Week Ahead
Figure 12: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
6/9
8:30
Initial Jobless Claims
6/4/2022
207kthousand
200kthousand
6/10
8:30
CPIConsumer Price
Index YoYyear on year
May
8.2%
8.3%
6/10
8:30
CPIConsumer Price
Index Ex Food and Energy
YoYyear on year
May
5.9%
6.2%
6/10
10:00
U. of Mich.University of Michigan Sentiment
JunJune P
58.2
58.4
This table lists a number of key economic events, analysis reports and forecasts from
influential institutions.
Sources: Bloomberg and Citi Global Wealth Investment as of June 3, 2022.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management