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Citi Personal Wealth Management

August Appreciation

Monthly Market Snapshot: August 2018

Highlights

As summer comes to an end, we can probably all appreciate the time-off that we normally take in August to “re-charge our batteries.” The U.S. equity market also appreciated this August with the S&P 500 rising by 3.0% during the month and hitting a record high of 2,914 on August 29th. On a global scale, equity markets posted just a 0.6% gain as emerging markets continued to struggle (falling 2.9%). Thus far, U.S. investors have been more rewarded for “staying home” than “going global.” However, with many potential negatives already priced in, any positive developments will likely be more beneficial to non-U.S. equity markets.

Away from equity markets, global growth remains healthy with real gross domestic product (GDP) likely to expand by about 3.4% in 2018 and 3.3% in 2019. We expect global growth to begin to slow heading into 2020, but to remain positive (Citi’s forecast for U.S. real GDP growth in 2020 is 1.8%).

The Citi Private Bank’s Global Investment Committee (GIC) remains modestly overweight global equities with a +1.5% active weighting (the fixed income side of the portfolio carries an underweight of -1.5%). Preferred equity market regions include Germany and France and emerging markets (particularly Asia). On the fixed income side, the GIC prefers short-term U.S. debt and inflation-linked debt.

Shawn Snyder
Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

U.S. Stock Market and Economic Forecasts

Figure 1: U.S. Stock Market and Economic Forecasts
Indicator 2017 2018E 2019E
S&P 500 Target 2,674 2,800 2,900 (Mid-Year)
S&P 500 P/E Ratio 20.79x 18.25x 17.22x
S&P 500 EPS Growth 11.7% 19.6% 6.0%
GDP 2.3% 3.0% 2.8%
Inflation 1.7% 2.1% 1.8%
Unemployment Rate 4.4% 3.8% 3.4%
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 August 31, 2018.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.

Regional Outlook

United States

Outline of the United States

Economy

The U.S. economy grew at a robust 4.2% in the second quarter of 2018. Real consumer spending rebounded strongly as consumers remained upbeat about their current financial situation. Citi’s economists believe that growth may slow a bit in the third quarter, but is likely to remain at healthy levels. Aside from growth, the labor market also remains strong with claims for unemployment insurance hitting lows last seen in the late 1960s.

Stocks

Citi Private Bank’s Global Investment Committee continues to hold a neutral rating on U.S. stocks. Corporate earnings climbed by 24.4% in the second quarter as strong consumer demand and lower corporate tax rates boosted profits. However, we still believe that market conditions warrant some caution as investor sentiment is once again approaching euphoric levels and trade relations between the U.S. and China may get worse, before they get better.

Bonds

The Fed continues to signal additional rate hikes. With short-term rates looking more appealing, Citi prefers short-term, higher quality debt like U.S. Treasuries, U.S. corporate debt, and municipal bonds for U.S. tax-payers.

Europe and Japan

Outline of Europe

Economy

Economic data in the Euro area have on balance been surprising to the upside in recent weeks. Citi’s economists believe that real GDP could come in at about 2.1% in 2018. In Japan, the economy looks likely to grow at a clip of about 0.9% in 2018 and 1.2% in 2019 (according to Citi’s economists). However, it should be noted that there may be some downside risk to these forecasts if the U.S. increases tariffs on foreign-produced autos.

Stocks

The GIC maintains a +0.5% overweight to European equities. We believe that trade-related risks (as well as concerns about Turkey’s economy) have caused investors to be excessively fearful. With the outlook for future corporate profits remaining upbeat, financial asset prices should eventually start to recover. As far as Japan, the region remains exposed to potential auto tariffs. While there’s no guarantee that auto tariffs will be put in place, we believe a neutral weighting on Japanese large caps is warranted.

Bonds

We still see the yields on most European and Japanese sovereign bonds as unacceptable. Corporate investment grade in Europe (ex UK) also remains an underweight.

Emerging Markets

Outline of China, indicating Emerging Markets

Economy

Emerging market economies are expected to accelerate by 4.7% in 2018. While still growing, Chinese growth is expected to slow from 6.7% year-on-year in the second quarter to 6.5% year-on-year in the second half. Pending fiscal stimulus efforts in China should help to offset trade concerns.

Stocks

Continued financial woes in both Turkey and Argentina have led to a more cautious stance towards emerging market shares. However, we see the risk of economic contagion as limited. While continued Fed tightening is likely to serve as a headwind to emerging market equities near-term, we still believe that emerging markets will likely provide the best returns over the coming decade. As such, the GIC remains modestly overweight emerging market equities.

Bonds

We are overweight emerging market fixed income – in line with our equity position.

Global Economic Forecasts

Figure 2: Global Economic Forecasts
Region GDP Growth CPI Inflation 10-Year Yields Exchange Rate vs. USD
2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F
Global 3.3 3.4 3.3 2.4 2.7 2.5 N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.8 3.9 3.9 3.0 3.2 3.2 N/A N/A N/A N/A N/A N/A
Industrial Countries 2.2 2.4 2.2 1.6 1.9 1.6 N/A N/A N/A N/A N/A N/A
United States 2.3 3.0 2.8 1.7 2.1 1.8 2.45 2.74 2.76 N/A N/A N/A
Euro Area 2.5 2.1 1.8 1.5 1.8 1.6 0.40 0.62 0.86 1.13 1.19 1.23
Japan 1.7 0.9 1.2 0.5 1.2 0.9 0.06 0.06 0.08 112 111 111
Emerging Markets 4.7 4.7 4.8 3.5 3.7 3.7 N/A N/A N/A N/A N/A N/A
China 6.9 6.6 6.4 1.6 2.0 2.1 3.51 3.49 3.29 6.76 6.54 6.46
❮ Swipe left for more
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
  Equity Returns (%) Valuations Div. Yld. (%)
Equities Level 2013 2014 2015 2016 2017 MTD QTD YTD P/E 12-Month
Forward P/E		 Current
Global 523 20.3 2.1 -4.3 5.6 21.6 0.6 3.5 1.9 17.7 15.8 2.4
S&P 500 2902 29.6 11.4 -0.7 9.5 19.4 3.0 6.7 8.5 21.0 17.9 1.8
DJIA 25965 26.5 7.5 -2.2 13.4 25.1 2.2 7.0 5.0 18.4 16.6 2.1
NASDAQ 8110 38.3 13.4 5.7 7.5 28.2 5.7 8.0 17.5 52.8 24.1 1.0
Europe 2948 18.0 1.2 3.9 0.7 21.2 -4.3 -0.4 -6.2 15.6 13.6 3.7
Japan 3352 56.7 7.1 9.1 0.4 21.8 0.2 0.6 -2.4 13.5 12.8 2.1
Emerging Markets 1056 -5.0 -4.6 -17.0 8.6 34.3 -2.9 -1.3 -8.8 12.6 12.1 2.7
❮ Swipe left for more
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 Returns (%) Other Key Rates
Fixed Income YTM 2013 2014 2015 2016 2017 MTD QTD YTD Instrument Current (%)
Global 2.10 -0.1 7.9 0.9 3.3 2.1 0.2 0.1 -0.4 10-Yr. U.S. Treasury 2.86
U.S. 3.31 -2.0 5.9 0.5 2.7 3.6 0.7 0.7 -1.0 30-Yr. U.S. Treasury 3.02
Europe 0.76 2.1 11.2 1.1 3.3 0.5 -0.2 -0.5 -0.2 1-Yr. CD Rate 1.07
EM Sovereign 5.99 -6.2 7.1 0.6 9.6 9.8 -2.2 0.2 -5.5 30-Yr. Fixed Mortgage 4.41
U.S. High Yield 6.61 7.2 1.8 -5.6 17.8 7.0 0.7 1.8 2.1 Prime Rate 5.00
❮ Swipe left for more
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: Global Asset Class Returns (Year-to-Date)
Figure 5: ...
This chart shows global asset class returns (year-to-date). Data shown indicates United States (S&P 500) at 8.5%; U.S. High Yield at 2.1%; Euro Broad Investment Grade at -0.2%; U.S. Broad Investment Grade at -1.0%; Japan (MSCI Japan) at -2.4%; EM Government Bond at -5.5%; Euro (Euro STOXX 50) at -6.2%; and Emerging Markets (MSCI EM) at -8.8%.
Sources:
Citi Research and Citi Personal Wealth Management as of August 31, 2018.There can be no assurance that these projections will be met. Actual results may be 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.
Figure 6: S&P 500 Sector Total Returns (Year-to-Date)
Figure 6: ...
This chart shows the total return for the various S&P 500 sectors (year-to-date). Data shown indicates Information Technology at 21.0%; Consumer Discretionary at 19.4%; Healthcare at 13.3%; S&P 500 at 9.9%; Energy at 4.8%; Utilities at 3.3%; Industrials at 2.6%; Financials at 2.4%; Materials at -0.7%; Telecommunications at -3.4%; and Consumer Staples at -4.3%.
Sources:
Citi Research and Citi Personal Wealth Management as of August 31, 2018.There can be no assurance that these projections will be met. Actual results may be 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.

Shawn Snyder
Shawn Snyder Head of Investment Strategy,
Citi Personal Wealth Management

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The MSCI ACWI (All Country World Index) captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. With 2,483 constituents, the index covers approximately 85% of the global investable equity opportunity set.

S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index.

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