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Citi Personal Wealth Management

A Merry (But Wary) March

Monthly Market Snapshot: March 2019

Highlights

Global stocks climbed 11.6% in the first quarter of 2019 – the strongest quarterly return since 2010. In the U.S., the S&P 500 returned 13.1% for the quarter while the Dow Jones gained 11.2%. Outside of the U.S., both Europe and Emerging Markets returned about 9.6%. Though we should acknowledge that the gains are coming on the back of rising global growth concerns and a 13.1% drawdown in global equities in the fourth quarter of 2018.

The recent rally can largely be attributed to two factors: 1) easing U.S. – China trade tensions and 2) a dramatic shift from the Federal Reserve. As recent as last September, the Fed was projecting three additional rate hikes in 2019. Now, the Fed is projecting zero. This dramatic shift has increased the odds that the U.S. business cycle may be extended.

Citi’s Private Bank’s Global Investment Committee (GIC) is maintaining its overweight to global equities (+2.0%). Key overweights include allocations to both U.S. large-cap and emerging market stocks (particularly emerging Asia). The Committee remains neutral on global fixed income, but sees opportunities in both intermediate-duration U.S. investment grade and emerging market debt.

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

Regional Outlook

United States

Outline of the United States

Economy (Slowing)

The U.S. economy has experienced a persistent slowing in growth since the second quarter of 2018 – falling from an annualized rate of 4.2% in 2Q18 to 3.4% in 3Q18 and 2.2% in 4Q18. For the first quarter, growth appears to be on track for about 1.7%. However, Citi’s economists are expecting growth to rebound in the second quarter of this year as the impact of the federal government shutdown fades and delayed tax returns boost consumer spending. On a year-on-year basis, growth may slow from a rate of about 2.9% in 2018 to about 2.5% in 2019.

Stocks (Overweight)

Citi Private Bank’s Global Investment Committee maintains an overweight on U.S. large-cap shares. A patient Fed should help to underpin equities. In addition, we think that downward revisions to earnings estimates have been too severe. However, we are expecting that pace of gains to moderate after the powerful first quarter rally. Citi believes that the S&P 500 will likely finished the year somewhere between 2,850 and 2,950.

Bonds (Overweight)

The Federal Reserve is now forecasting zero rate hikes in 2019 and just one rate hike in 2020. It has also announced that it will end its balance sheet reductions in September. Against this backdrop, the GIC has decided to shift some of its short-term investment grade debt overweight into intermediate-term investment grade debt.

Europe and Japan

Outline of Europe

Economy (Slowing)

Growth forecasts for the euro area continue to come down. Citi’s economists have been steadily reducing their 2019 year-on-year forecast – bringing it down from 1.5% in December to just 1.0% currently. A technical recession does not appear imminent, but the next four- to five- months of data will be critical in making that assessment. In Japan, several industries remain exposed to the slowdown in China. As a result, growth estimates for 2019 have been downgraded – falling from 1.0% to 0.9%. Growth in 2020 looks even more challenging with Citi’s economists calling for just 0.1% growth in Japan.

Stocks (Neutral)

The GIC is neutral on both European and Japanese large-cap shares. Relatively anemic economic growth and greater exposure to the slowdown in China still leave us cautious. In Japan, there does appear to be opportunities in select sectors like robotics and automation, but selectivity is key.

Bonds (Underweight)

Even though monetary policy remains accommodative in both the European Union and Japan, we still see the yields on most European and Japanese sovereign bonds as unacceptable.

Emerging Markets

Outline of China, indicating Emerging Markets

Economy (Slowing)

Emerging market economies are expected to grow by 4.4% in 2019 – slightly slower than in 2018. China’s economy will likely slow from a year-on-year growth rate of 6.6% in 2018 to 6.2% in 2019. However, we think that growth may start to stabilize later this year as stimulus measures take hold. The broader emerging Asia region may grow by 5.7% year-on-year.

Stocks (Overweight)

The GIC is overweight emerging market equities. Emerging markets seem to be in a sweet spot due to a more dovish Fed and easing U.S. – China trade tensions. In addition, price-to-earnings (P/E) ratios in the emerging world are noticeably lower than in the developed world and corporate earnings are set to outstrip U.S. earnings in 2019 (5.9% year-on-year earnings-per-share growth versus 4.5%).

Bonds (Slightly Overweight)

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

U.S. Stock Market and Economic Forecasts

Figure 1: U.S. Stock Market and Economic Forecasts
Indicator 2018A 2019F 2020F
S&P 500 Target 2,507 2,850 N/A
S&P 500 P/E Ratio 15.43x 17.33x 16.32x
S&P 500 EPS Growth 22.20% 6.20% 11.30%
GDP 2.90% 2.50% 2.00%
Inflation 2.00% 1.60% 1.90%
Unemployment Rate 3.90% 3.60% 3.40%
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 March 28, 2019. Note: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. 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.

Global Economic Forecasts

Figure 2: Global Economic Forecasts
Region GDP Growth CPI Inflation 10-Year Yields Exchange Rate vs. USD
2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F
Global 2.8 2.9 2.9 2.4 2.5 2.4 N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.4 3.6 3.9 3.1 3.1 3.2 N/A N/A N/A N/A N/A N/A
Industrial Countries 1.7 1.7 1.6 1.4 1.7 1.7 N/A N/A N/A N/A N/A N/A
United States 2.5 2.0 1.8 1.6 1.9 2.0 2.85 2.85 2.85 N/A N/A N/A
Euro Area 1.0 1.5 1.6 1.2 1.5 1.6 0.14 0.50 0.68 1.16 1.24 1.31
Japan 0.4 0.1 0.5 0.7 1.3 0.8 0.03 0.20 0.20 108 98 91
Emerging Markets 4.4 4.6 4.7 3.8 3.5 3.3 N/A N/A N/A N/A N/A N/A
China 6.2 6.0 5.8 1.9 2.1 2.0 2.91 2.96 2.96 6.60 6.29 6.09
❮ 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 2014 2015 2016 2017 2018 MTD QTD YTD P/E 12-Month
Forward P/E		 Current
Global 509 2.1 -4.3 5.6 21.6 -11.2 1.0 11.6 11.6 16.8 15.3 2.5
S&P 500 2834 11.4 -0.7 9.5 19.4 -6.2 1.8 13.1 13.1 18.9 17.2 1.9
DJIA 25929 7.5 -2.2 13.4 25.1 -5.6 0.0 11.2 11.2 16.7 15.9 2.2
NASDAQ 7729 13.4 5.7 7.5 28.2 -3.9 2.6 16.5 16.5 31.9 22.7 1.1
Europe 2811 1.2 3.9 0.7 21.2 -18.5 0.2 9.7 9.7 16.5 13.5 3.6
Japan 3102 7.1 9.1 0.4 21.8 -14.5 -0.3 5.7 5.7 13.4 12.7 2.4
Emerging Markets 1058 -4.6 -17.0 8.6 34.3 -16.6 0.7 9.6 9.6 13.0 12.6 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 2014 2015 2016 2017 2018 MTD QTD YTD Instrument Current (%)
Global 1.82 7.9 0.9 3.3 2.1 0.5 1.8 2.7 2.7 10-Yr. U.S. Treasury 2.41
U.S. 2.95 5.9 0.5 2.7 3.6 0.0 2.0 2.9 2.9 30-Yr. U.S. Treasury 2.81
Europe 0.48 11.2 1.1 3.3 0.5 0.5 1.7 2.5 2.5 1-Yr. CD Rate 1.46
EM Sovereign 5.47 7.1 0.6 9.6 9.8 -4.1 1.1 6.1 6.1 30-Yr. Fixed Mortgage 4.08
U.S. High Yield 6.81 1.8 -5.6 17.8 7.0 -2.1 1.0 7.4 7.4 Prime Rate 5.50
❮ 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 13.1%; Euro (Euro STOXX 50) at 9.7%; Emerging Markets (MSCI EM) at 9.6%; U.S. High Yield at 7.4%; EM Government Bond at 6.1%; Japan (MSCI Japan) at 5.7%; U.S. Broad Investment Grade at 2.9%; and Euro Broad Investment Grade at 2.5%.
Sources:
Citi Research and Citi Personal Wealth Management as of March 29, 2019. 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 19.9%; Real Estate at 17.5%; Industrials at 17.2%; Energy at 16.4%; Consumer Discretionary at 15.7%; Communication Services at 14.0%; S&P 500 at 13.6%; Consumer Staples at 12.0%; Utilities at 10.8%; Materials at 10.3%; Financials at 8.6%; and Healthcare at 6.6%.
Sources:
Citi Research and Citi Personal Wealth Management as of March 29, 2019. 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.

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