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Citi Personal Wealth Management

A Red October

Monthly Market Snapshot: October 2018

Highlights

Global stock markets tumbled in October. In the U.S., the S&P 500 finished the month 6.9% lower – leaving the index up just 1.4% for the year. Equities outside of the U.S. have fared even worse with the MCSI All Country World Index (excluding the U.S.) sliding 8.2% during the month. A number of factors have contributed to the sell-off: signals of tighter Fed policy, geopolitical tensions (China, Saudi Arabia, etc.), the upcoming U.S. mid-term elections, slowing global growth, and a re-rating of earnings expectations.

We see recent developments as part of a normal market correction (meaning a sell-off of at least 10%). Importantly, we do not see this as the end of the bull market, nor the end of the business cycle. Corporate profits, economic growth, and consumer sentiment each remain fairly robust. It is always difficult to identify a bottoming in equity markets, but we suspect that the latter months of this year will be more positive.

Citi Private Bank’s Global Investment Committee (GIC) remains slightly overweight global equities, but has reduced its exposure and is actively increasing portfolio quality. As part of this reduction, the GIC has reduced its weighting on small- and mid-cap U.S. stocks from neutral to a slight underweight. Preferred assets include short-duration U.S. Treasuries and corporate 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 3,100
S&P 500 P/E Ratio 20.79x 17.02x 16.06x
S&P 500 EPS Growth 11.7% 19.6% 6.0%
GDP 2.3% 2.9% 2.8%
Inflation 1.7% 2.1% 1.9%
Unemployment Rate 4.4% 3.9% 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 October 31, 2018. 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.

Regional Outlook

United States

Outline of the United States

Economy (Growing)

The U.S. economy remains solid, but has slowed down a bit. Following a robust real GDP growth rate of 4.2% annualized in the second quarter, growth cooled off to a 3.5% annualized rate in the third quarter as net exports served as drag. Importantly, consumer spending remained robust. Moving forward, we expect growth to remain solid over the next couple of quarters and then to fade a bit as the fiscal stimulus boost from the recently passed tax cuts start to fade. A year-on-year growth rate of 2.9% seems likely in 2018.

Stocks (Neutral)

Citi Private Bank’s Global Investment Committee continues to hold a neutral (or fully-invested) rating on U.S. stocks. Corporate earnings are tracking about 24% higher than a year ago and the consumer remains remarkably upbeat. However, the pace of earnings growth is likely to slow some next year as earnings will be compared to the stellar growth in 2018. In addition, a less accommodative Federal Reserve suggests that U.S. outperformance may fade a bit.

Bonds (Overweight)

The Fed is likely to raise rates again at their December meeting – bringing the fed funds rate up from 2.25% to 2.50%. 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 (Slowing)

Euro area economic activity looks relatively weak with Citi’s economists forecasting that real GDP growth may slow to 1.0% annualized in the third quarter before picking up again in the fourth quarter (possibly to a level of 1.5%). In Japan, growth estimates are being upwardly revised on the back of a potential fiscal boost from the upcoming FY2018 supplementary budgets. As such, Citi’s economists have bumped up their annual growth forecast for 2019 from 1.3% to 1.6%.

Stocks (Slightly Overweight)

The GIC maintains a modest overweight to European (ex UK) equities. Equity dividend yields easily eclipse corporate bond yields in the region, suggesting that equities are likely the better value. We remain neutral on the UK as Brexit risks are still material to the outlook. As far as Japan, the region still remains exposed to potential auto tariffs. While we see some attractive areas like robotics and automation, we believe that a neutral weighting on Japanese shares is still warranted.

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 4.7% this year – the same pace as last year. However, economic activity in China has been slowing some. Citi’s economists expect China to slow to 6.4% year-on-year growth in the fourth quarter. Moving forward, we expect China to shift from deleveraging to stimulus – which should help the country to weather the recent trade skirmish.

Stocks (Slightly Overweight)

Forward returns in emerging market shares look increasingly attractive with emerging market earnings-per-share expected to rise by 11% in 2019 (versus 9.1% in developed markets). If trade fears ease further, emerging market shares should rebound. Particularly if the Fed blinks on future rate hikes and takes a pause in 2019. As such, the GIC remains slightly overweight emerging market equities.

Bonds (Overweight)

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 3.3 3.2 2.4 2.8 2.8 N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.8 3.8 3.7 3.0 3.3 3.7 N/A N/A N/A N/A N/A N/A
Industrial Countries 2.2 2.3 2.2 1.6 1.9 1.8 N/A N/A N/A N/A N/A N/A
United States 2.3 2.9 2.8 1.8 2.1 1.9 2.45 2.80 2.85 N/A N/A N/A
Euro Area 2.5 1.9 1.7 1.5 1.8 1.8 0.40 0.52 0.76 1.13 1.18 1.19
Japan 1.7 1.0 1.6 0.5 0.9 0.9 0.06 0.11 0.19 112 111 113
Emerging Markets 4.7 4.7 4.6 3.6 4.0 4.3 N/A N/A N/A N/A N/A N/A
China 6.9 6.6 6.4 1.6 2.2 2.5 3.51 3.49 3.29 6.76 6.69 6.90
❮ 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 485 20.3 2.1 -4.3 5.6 21.6 -7.6 -7.6 -5.5 16.1 14.7 2.6
S&P 500 2712 29.6 11.4 -0.7 9.5 19.4 -6.9 -6.9 1.4 19.1 16.7 1.9
DJIA 25116 26.5 7.5 -2.2 13.4 25.1 -5.1 -5.1 1.6 17.2 15.9 2.2
NASDAQ 7306 38.3 13.4 5.7 7.5 28.2 -9.2 -9.2 5.8 41.8 21.5 1.1
Europe 2706 18.0 1.2 3.9 0.7 21.2 -8.2 -8.2 -13.9 14.9 13.2 3.8
Japan 3139 56.7 7.1 9.1 0.4 21.8 -8.5 -8.5 -8.6 13.0 12.4 2.3
Emerging Markets 956 -5.0 -4.6 -17.0 8.6 34.3 -8.8 -8.8 -17.5 11.5 11.1 3.1
❮ 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 2.25 -0.1 7.9 0.9 3.3 2.1 -0.3 -0.3 -1.3 10-Yr. U.S. Treasury 3.14
U.S. 3.54 -2.0 5.9 0.5 2.7 3.6 -0.8 -0.8 -2.4 30-Yr. U.S. Treasury 3.39
Europe 0.81 2.1 11.2 1.1 3.3 0.5 0.0 0.0 -0.5 1-Yr. CD Rate 1.17
EM Sovereign 6.06 -6.2 7.1 0.6 9.6 9.8 -2.0 -2.0 -5.5 30-Yr. Fixed Mortgage 4.75
U.S. High Yield 7.10 7.2 1.8 -5.6 17.8 7.0 -1.6 -1.6 1.1 Prime Rate 5.25
❮ 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. High Yield at 2.7%; United States (S&P 500) at 1.4%; Euro Broad Investment Grade at -0.5%; U.S. Broad Investment Grade at -1.6%; EM Government Bond at -3.5%; Japan (MSCI Japan) at -8.6%; Euro (Euro STOXX 50) at -13.9%; and Emerging Markets (MSCI EM) at -17.5%.
Sources:
Citi Research and Citi Personal Wealth Management as of October 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 11.0%; Healthcare at 8.8%; Consumer Discretionary at 7.0%; Utilities at 4.7%; S&P 500 at 3.0%; Consumer Staples at -1.1%; Energy at -4.6%; Financials at -4.6%; Telecommunications at -5.0%; Industrials at -6.5%; and Materials at -11.9%.
Sources:
Citi Research and Citi Personal Wealth Management as of October 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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