May 28, 2024 | 3 MIN READ

Weekly Market Update

The Blessing of Low Global Expectations

What happened last week?

The S&P 500 and Nasdaq rose 0.03% and 1.41%, respectively, while the Dow fell by -2.33%. All three indices had recently made new all-time highs, but robust data on Thursday dashed investors’ hopes for near-term Fed rate cuts.

S&P Global data showed stronger-than-expected manufacturing and services sectors while initial jobless claims data pointed to a labor market that is cooling slowly.

3 Things to Know

Citi Revises Global Growth Forecasts Upwards for 2024, 2025

The widening of the economic expansion across regions and a broadening of corporate profits across more global industries requires us to act in portfolios.

Equities outside the US have trailed behind US shares by 15 percentage points over the past 12 months. This is the most severe period of underperformance since 2012.

Our medium-risk global asset allocation model has been 5.5% overweight US equities and 3.5% underweight non-US shares. The international underweight appears too pessimistic considering developing fundamentals.

We softened this slightly by bringing US equity themes down to 4.5% overweight and funding an increase in Asia and Europe in part with short-term US fixed income.

Last year, the world suffered a manufacturing and trade contraction, not quite as severe as a “garden variety” recession, but quite similar in complexion.

During this time, the ongoing recovery in US services employment masked or “hid” these economic losses.

The declines in trade and goods production were far more relevant for economies such as Germany, Japan and China than the US. With the Fed’s historically heavy focus on US employment, this meant that US interest rate pressure was sustained while cyclical industries posted profit declines.

Excluding the largest seven US tech-related firms by market cap, S&P 500 EPS fell 6.5% last year. Outside the US, EPS fell 7.5% in 2023.

But 2024 Looks Different for Europe, Asia

Europe’s moribund economy is coming to life after more than a year stalled out. While growth may have been pitiful, Europe has shown the great flexibility of the world economy to adapt to challenges.

Unlike petroleum trade, pipelines of gas from Russia cannot be re-directed. Liquid natural gas (LNG) trade has ramped up to replace this need. Along with conservation, Europe’s natural gas price is now below the levels paid when Russia was the most critical supplier.

Japan is emblematic of the beneficiaries of the global trade and production cycle. It produces many of the technology goods US investors value highly.

After decades in slumber, managers are rewarding shareholders with rising dividends and a focus on capital return. China has also seen economic activity track above our conservative estimates. Of greatest interest, authorities have turned to quantitative easing to expand broad credit.

This aims to stabilize its property market through programs including direct purchases. China faces external risks and depressed domestic consumer psychology.

Nonetheless, we can’t ignore the adjustment the Chinese property market has already suffered in assessing the outlook for its economy.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorraine Schmitt - North America Investment Strategy

See our weekly CIO Strategy Bulletin for more details