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.

Citi Personal Wealth Management
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% |
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

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

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

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
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 |
Market Indicators
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 |
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 |
Asset Class Returns (Sorted by Performance)

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.

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.