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Citi Personal Wealth Management

A Gigantic January

Monthly Market Snapshot: January 2019

Highlights

Global equities rebounded sharply in January. In the United States, the S&P 500 jumped 7.9% and the NASDAQ powered ahead with a 9.2% gain. Outside of the U.S., performance was also strong with European, Japanese, and Emerging Market shares rallying 5.7%, 6.1%, and 8.7%, respectively.

A more cautious Federal Reserve, a more optimistic view on U.S. – China trade relations, and strong employment reports helped markets to rebound. Moving forward, equity market performance will likely depend on the depth of the global economic slowdown. We remain in the camp that expects a slowdown, not a recession. As such, we believe that equity markets still have some room to run before peaking.

Citi’s Private Bank’s Global Investment Committee (GIC) decided to raise its overweight to global equities from +1.0% to +2.0%. Increased allocations were made to U.S. large-cap and emerging Asia stocks while reductions were made to continental Europe. A reduction in the cash position was used to fund an increase in global fixed income exposure – bringing the global fixed income weighting to neutral. Increases were made to government guaranteed and short- and intermediate-term U.S. investment grade credit.

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 is showing some signs of weakness. A dismal equity market performance in the fourth quarter of 2018 and the longest federal government shutdown in U.S. history weighed on both consumer and business confidence. As a result of the shutdown, Citi’s economists have lowered their 1Q19 forecast from 2.7% to 2.1%. Growth may decelerate to a pace of about 1.8% by year-end as we move past peak stimulus from the tax cuts.

Stocks (Overweight)

Citi Private Bank’s Global Investment Committee raised its allocation to U.S. large-cap stocks. While the pace of gains seen year-to-date is likely to slow; a less aggressive Fed, progress on trade negotiations, and a moderating, but growing U.S. economy should support stocks. We acknowledge that risks to growth are probably to the downside, but do not foresee a U.S. recession in 2019.

Bonds (Overweight)

The Federal Reserve has shifted course and is now “on hold” regarding future rate increases. The GIC added further to its overweight position in short- and intermediate-term investment grade debt. This is now the largest overweight in the portfolio. The Committee also likes short-duration U.S. Treasuries and municipal bonds for U.S. tax-payers.

Europe and Japan

Outline of Europe

Economy (Slowing)

Citi’s economists do not see compelling evidence that the euro area is at risk of recession in the first half of 2019, but evidence does point to a clear deceleration. As a result, they have revised down their 2019 growth forecast from 1.5% to 1.2%. In Japan, growth has been revised downward for 2019 – from 1.1% to 1.0%. The region remains exposed to trade tensions, but our economists believe that the U.S. is unlikely to impose high tariffs on Japanese autos.

Stocks (Slightly Overweight)

The GIC reduced its overweight to continental Europe – taking down exposures to France and small- and mid-cap shares. We see the sluggish European recovery as persisting, but external risks related to China’s slowing leaves us less optimistic. As far as Japan, we see opportunities in robotics and automation, but are maintaining a neutral weighting.

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 (Stable)

Emerging market economies as a whole are expected to grow by 4.4% in 2019 – slightly slower than in 2018. China’s economy will likely slow, but still expand by 6.2% year-on-year. The broader emerging Asia region may grow by 5.7% year-on-year. While trade tensions pose a notable risk, they could also serve as a positive surprise if tariffs are reduced. China may also see policy-driven “green shoots.”

Stocks (Overweight)

The GIC is overweight emerging market equities – recently increasing its exposure to emerging Asian equities. Emerging markets should benefit from a more cautious Federal Reserve and the potential for a weaker U.S. dollar. The recent decline in valuations also adds to the appeal.

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 2017 2018E 2019E
S&P 500 Target 2,674 2,507 2,850
S&P 500 P/E Ratio 20.11x 15.43x 14.43x
S&P 500 EPS Growth 11.7% 22.2% 6.2%
GDP 2.3% 2.9% 2.6%
Inflation 1.7% 2.0% 1.1%
Unemployment Rate 4.4% 3.9% 3.5%
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 January 31, 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
2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F
Global 3.2 3.0 2.9 2.7 2.3 2.5 N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.8 3.5 3.6 3.2 3.1 3.1 N/A N/A N/A N/A N/A N/A
Industrial Countries 2.2 1.9 1.7 1.8 1.1 1.7 N/A N/A N/A N/A N/A N/A
United States 2.9 2.6 2.0 2.0 1.1 2.0 2.80 2.85 2.85 N/A N/A N/A
Euro Area 1.8 1.2 1.6 1.7 1.1 1.5 0.52 0.30 0.82 1.18 1.18 1.27
Japan 0.7 1.0 0.2 1.0 0.7 1.1 0.07 0.12 0.23 111 108 98
Emerging Markets 4.6 4.4 4.6 3.9 3.8 3.5 N/A N/A N/A N/A N/A N/A
China 6.6 6.2 6.0 2.1 1.9 2.1 3.38 2.91 2.96 6.66 6.93 6.70
❮ 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 491 2.1 -4.3 5.6 21.6 -11.2 7.8 7.8 7.8 16.0 14.4 2.6
S&P 500 2704 11.4 -0.7 9.5 19.4 -6.2 7.9 7.9 7.9 18.1 16.1 2.0
DJIA 25000 7.5 -2.2 13.4 25.1 -5.6 7.2 7.2 7.2 16.3 15.2 2.3
NASDAQ 7282 13.4 5.7 7.5 28.2 -3.9 9.7 9.7 9.7 32.8 20.6 1.1
Europe 2708 1.2 3.9 0.7 21.2 -18.5 5.7 5.7 5.7 14.0 12.5 3.8
Japan 3115 7.1 9.1 0.4 21.8 -14.5 6.1 6.1 6.1 12.3 12.1 2.4
Emerging Markets 1050 -4.6 -17.0 8.6 34.3 -16.6 8.7 8.7 8.7 12.6 12.0 2.8
❮ 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 2.08 7.9 0.9 3.3 2.1 0.5 1.0 1.0 1.0 10-Yr. U.S. Treasury 2.63
U.S. 3.31 5.9 0.5 2.7 3.6 0.0 1.0 1.0 1.0 30-Yr. U.S. Treasury 3.00
Europe 0.67 11.2 1.1 3.3 0.5 0.5 0.9 0.9 0.9 1-Yr. CD Rate 1.41
EM Sovereign 5.69 7.1 0.6 9.6 9.8 -4.1 3.7 3.7 3.7 30-Yr. Fixed Mortgage 4.37
U.S. High Yield 7.35 1.8 -5.6 17.8 7.0 -2.1 4.7 4.7 4.7 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 Emerging Markets (MSCI EM) at 8.7% United States (S&P 500) at 7.9%; Japan (MSCI Japan) at 6.1%; Euro (Euro STOXX 50) at 5.7%; U.S. High Yield at 4.7%; EM Government Bond at 3.7%; U.S. Broad Investment Grade at 1.0%; and Euro Broad Investment Grade at 0.9%.
Sources:
Citi Research and Citi Personal Wealth Management as of January 31, 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 Industrials at 11.4%; Energy at 11.1%; Real Estate at 10.8%; Communication Services at 10.4% Consumer Discretionary at 10.3%; Financials at 8.8%; S&P 500 at 8.0%; Information Technology at 7.0%; Materials at 5.5%; Consumer Staples at 5.2%; Healthcare at 4.8%; and Utilities at 3.4%.
Sources:
Citi Research and Citi Personal Wealth Management as of January 31, 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.

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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