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Citi Personal Wealth Management

A Forced March Lower

Monthly Market Snapshot: March 2020

Highlights

Stock benchmarks experienced their worst month (and quarter) since the Global Financial Crisis as the spread of COVID-19 forced investors to rush to safe-haven assets as economic activity shut down across many regions. In the United States, the S&P 500 plunged 12.5% in March while the Dow Jones tumbled 13.7%. The 10-year U.S. Treasury yield plummeted from 1.15% at the end of February to 0.67% at the end of March.

The coronavirus continues to cloud the economic outlook. A deep economic contraction is widely expected. Investors are less certain about the trajectory of the recovery. If containment measures and warm weather are successful in combating the virus, then a V-shaped recovery may be possible. However, if the duration of the pandemic is extended, then the recovery may take longer than markets are pricing in. Small business solvency remains a key question.

On February 24th, Citi Private Bank’s Global Investment Committee (GIC) decided to reduce its exposure to global equities. Those reductions were offset by adding to the GIC’s overweight position in U.S. Treasuries and gold. Citi’s year-end target for the S&P 500 is 2,700 and presents upside from today’s levels.

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 will likely contract in the first and second quarters of 2020 as social distancing measures take their toll. Second quarter data will likely reflect the worst of the virus’ impact with Citi’s economists expecting a sharp -27.7% annualized decline in growth during the quarter. Assuming some return to normalcy, the economy should rebound in the second half of the year. However, the duration of the virus and solvency of small businesses will be key in determining the trajectory of the recovery. The unemployment rate could easily climb above 10.0% before starting to decline when businesses reopen.

Stocks (Neutral)

Citi Private Bank’s Global Investment Committee maintains a neutral position on U.S. stocks. After a sharp acceleration downward, equities look more attractive, but we think it’s too early to call a market bottom. A sustained decline in the rate of infections in the U.S. is a key metric we will be watching. Until we get more clarity on the duration of the virus, we think caution is still warranted.

Bonds (Overweight)

The Federal Reserve cut the fed funds rate to a range of 0.0% to 0.25% and embarked on limitless quantitative easing to provide market liquidity. While investment-grade and municipal debt suffered losses as investors moved to raise cash, moves from the Federal Reserve have added to stability of late. We still expect U.S. Treasuries to act as a portfolio buffer if stocks see another leg down. As such, the GIC is maintaining its overweight in short-, intermediate-, and long-duration U.S. Treasuries.

Europe and Japan

Outline of Europe

Economy (Europe: Slowing / Japan: Slowing)

Citi’s economists expect a deep recession to occur in the Euro Area with four quarters of year-on-year contraction. For the entirety of 2020, growth may contract by -8.4%. In Japan, a full year of recession also seems possible, but with growth improving to -1.9% on a year-on-year basis in the fourth quarter. The virus is likely to weigh more on services-based economies than manufacturing-driven economies.

Stocks (Europe: Neutral / Japan: Neutral)

The GIC is maintaining a neutral position on both European (ex-UK) and Japanese stocks. European equities are stabilizing after tentative signs the spread of the virus is slowing in hard-hit Italy, but the health of the banking system remains a lingering risk. In Japan, a state of emergency could be declared in Tokyo, presenting the possibility of downward pressure on the economy and markets.

Bonds (Underweight)

The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.

Emerging Markets

Outline of China, indicating Emerging Markets

Economy (Slowing)

Emerging market forecasts have been downgraded, but still show positive growth with projections averaging just above 1.0% year-on-year. Purchasing managers index readings in China are already showing some bounce back in regional economic activity. South Korea and Taiwan are projected to avoid recession this year.

Stocks (Neutral)

The GIC maintains a neutral weighting on emerging markets. As China reopens its economy, equities in Asia could prove more resilient as more advanced economies are just embarking on containment measures. However, new lockdown measures in India, Malaysia and Australia pose some risk. The GIC remains long term optimistic on Asian consumption, technology and healthcare themes.

Bonds (Overweight)

We are overweight emerging market fixed income as U.S. dollar-denominated debt still offers some of the best relative value in global fixed income. We stress the importance of global diversification when investing in emerging markets.

U.S. Stock Market and Economic Forecasts

Figure 1: U.S. Stock Market and Economic Forecasts
Indicator 2018A 2019A 2020F
S&P 500 Target 2,507 3,050 2,700
S&P 500 P/E Ratio 15.43x 18.97x 21.04x
S&P 500 EPS Growth 22.5% 2.0% -24.0%
GDP 2.9% 2.3% -2.6%
Inflation 2.0% 1.4% 0.7%
Unemployment Rate 3.9% 3.7% 4.9%
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 27, 2020. Note 1: The S&P 500 P/E ratio is based on trailing four-quarter S&P 500 operating earnings-per-share. Note 2: “A” means actual; “F” means forecast. 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 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.0 -0.6 4.2 3.2 2.9 3.1 N/A N/A N/A N/A N/A N/A
Industrial Countries 1.7 1.4 1.6 N/A N/A N/A N/A N/A N/A N/A N/A N/A
United States 2.3 -2.6 2.1 1.4 0.7 2.1 1.92 1.25 1.25 N/A N/A N/A
Euro Area 1.2 -8.4 4.9 1.2 0.6 1.5 -0.30 -0.49 -0.19 1.12 1.15 1.18
Japan 0.7 -1.9 1.5 0.5 0.5 0.4 -0.10 -0.03 0.11 109 101 96
Emerging Markets N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
China 6.1 2.4 6.9 2.9 3.6 1.9 2.99 2.64 2.90 6.91 6.89 6.67
❮ 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 2015 2016 2017 2018 2019 MTD QTD YTD P/E 12-Month
Forward P/E		 Current
Global 442 -4.3 5.6 21.6 -11.2 24.0 -13.7 -21.7 -21.7 15.0 14.2 3.1
S&P 500 2585 -0.7 9.5 19.4 -6.2 28.9 -12.5 -20.0 -20.0 16.4 16.1 2.4
DJIA 21917 -2.2 13.4 25.1 -5.6 22.3 -13.7 -23.2 -23.2 14.9 15.4 3.0
NASDAQ 7700 5.7 7.5 28.2 -3.9 35.2 -10.1 -14.2 -14.2 46.5 22.4 1.3
Europe 2284 3.9 0.7 21.2 -18.5 22.5 -16.4 -27.3 -27.3 14.3 12.3 4.6
Japan 2830 9.1 0.4 21.8 -14.5 17.1 -8.1 -17.7 -17.7 12.8 11.4 2.8
Emerging Markets 849 -17.0 8.6 34.4 -16.6 15.4 -15.6 -23.9 -23.9 11.8 11.4 3.3
❮ 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 2015 2016 2017 2018 2019 MTD QTD YTD Instrument Current (%)
Global 1.12 0.9 3.3 2.1 0.5 7.1 -1.4 1.6 1.6 10-Yr. U.S. Treasury 0.67
U.S. 1.65 0.5 2.7 3.6 0.0 8.9 -0.5 3.2 3.2 30-Yr. U.S. Treasury 1.32
Europe 0.51 1.1 3.3 0.5 0.5 6.0 -3.5 -1.2 -1.2 1-Yr. CD Rate 0.68
EM Sovereign 7.49 0.6 9.6 9.8 -4.1 14.8 -13.5 -13.0 -13.0 30-Yr. Fixed Mortgage 3.86
U.S. High Yield 9.99 -5.6 17.8 7.0 -2.1 14.1 -11.6 -13.1 -13.1 Prime Rate 3.25
❮ 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 U.S. Broad Investment Grade at 3.2%, Euro Broad Investment Grade at -1.2%, EM Government Bond at -13.0%, U.S. High Yield at -13.1%, Japan (MSCI Japan) at -17.7%, United States (S&P 500) at -20.0%, Emerging Markets (MSCI EM) at -23.9%, and Euro (Euro STOXX 50) at -27.3%.
Sources: Citi Research and Citi Personal Wealth Management as of March 31, 2020. 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 -11.9%, Healthcare at -12.7%, Consumer Staples at -12.7%, Utilities at -13.5%, Communication Services at -17.0%, Real Estate at -19.2%, Consumer Discretionary at -19.3%, S&P 500 at -19.6%, Materials at -26.1%, Industrials at -27.0%, Financials at -31.9%, and Energy at -50.5%.
Sources: Citi Research and Citi Personal Wealth Management as of March 31, 2020. 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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