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Citi Personal Wealth Management

A Surprising September

Monthly Market Snapshot: September 2018

Highlights

It is likely no surprise that U.S. and Chinese trade relations remain strained. However, the outperformance of U.S. equity markets in the face of rising tariffs may have surprised some investors. During the third quarter, U.S. equities pushed powerfully higher with the S&P 500 returning 7.2% - the best quarterly gain since late 2013. Excluding the U.S., global equities were flat. However, the fourth quarter tends to be a positive one for risk assets. We would not be surprised to see global equities (particularly non-U.S.) rebound during this period.

Global growth remains strong across the board, but the U.S. has been exceptionally strong. Citi’s economists expect global real gross domestic product (GDP) to expand by about 3.3% in both 2018 and 2019. We expect global growth to slow heading into 2020, but remain fairly positive overall.

Citi Private Bank’s Global Investment Committee (GIC) remains modestly overweight global equities and slightly underweight global fixed income. Preferred equity market regions include Germany, France, and emerging markets (particularly Asia). On the fixed income side, the GIC prefers short-term U.S. debt and inflation-linked debt. Underweights include most European and Japanese sovereign bonds.

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 18.33x 17.29x
S&P 500 EPS Growth 11.7% 19.6% 6.0%
GDP 2.3% 2.9% 2.8%
Inflation 1.7% 2.1% 1.8%
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 September 28, 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 robust, but the pace of growth is likely to taper off a bit. Citi’s economists believe that real GDP will moderate from 4.2% annualized in the second quarter to 3.2% annualized in the third quarter. We still expect consumer spending to remain strong, but the one-time surge in exports ahead of recently announced tariffs is unlikely to repeat. The labor market also remains strong with the unemployment rate at just 3.9% - a level last seen in 2000.

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 with about 1/3rd of the gains related to the reduction in the corporate tax rate. However, this boost in earnings is becoming increasingly priced in and puts some limitations on future gains. U.S. outperformance may fade a bit.

Bonds (Slightly Overweight)

The Fed decided to raise the fed funds rate from 2.00% to 2.25% at their September meeting. We expect them to raise rates again in December with a market-implied probability of 70%. 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 has slowed noticeably with growth slipping from 2.7% in the back half of 2017 to 1.5% in the first half of 2018. However, we think that growth should pick up in the second half (to 1.8%). In Japan, a series of natural disasters (a hurricane, flooding, and earthquake) are likely to weigh on growth. As such, Citi’s economists are predicting that growth may slip from 3.0% annualized in the second quarter to -0.5% in the third quarter. However, once reconstruction begins, growth should rebound.

Stocks (Slightly Overweight)

The GIC maintains a modest overweight to European equities. We believe that trade-related risks 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. It is starting to look like a trade deal between the U.S. and Japan will be reached, but we believe that a neutral weighting on Japanese shares is warranted until we get more clarity.

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)

Even though there have been pockets of weakness (Turkey, Argentina, China), emerging market economies as a whole are still expected to grow by 4.7% this year – the same pace as last year. Activity has been weak in China and trade tensions remain a concern, but a broad policy mix of fiscal policy, monetary policy, and currency policy should help growth in China to stabilize in the second half.

Stocks (Slightly Overweight)

Forward returns in emerging market shares looking increasingly attractive with emerging market earnings-per-share on pace for 15% growth in 2018. If trade fears ease further, emerging market shares should rebound. Particularly if the Fed starts to adopt a more dovish tone in 2019. As such, the GIC remains modestly 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 3.3 2.4 2.7 2.7 N/A N/A N/A N/A N/A N/A
Based on PPP Weights 3.8 3.9 3.7 3.0 3.3 3.5 N/A N/A N/A N/A N/A N/A
Industrial Countries 2.2 2.3 2.2 1.6 1.9 1.7 N/A N/A N/A N/A N/A N/A
United States 2.3 2.9 2.8 1.8 2.1 1.8 2.45 2.80 2.85 N/A N/A N/A
Euro Area 2.5 1.9 1.7 1.5 1.8 1.7 0.40 0.53 0.76 1.13 1.18 1.16
Japan 1.7 1.0 1.3 0.5 0.8 0.7 0.06 0.09 0.14 112 111 112
Emerging Markets 4.7 4.7 4.7 3.5 3.9 4.0 N/A N/A N/A N/A N/A N/A
China 6.9 6.6 6.4 1.6 2.2 2.2 3.51 3.49 3.29 6.76 6.84 6.68
❮ 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 524 20.3 2.1 -4.3 5.6 21.6 0.3 3.8 2.2 17.8 15.9 2.4
S&P 500 2914 29.6 11.4 -0.7 9.5 19.4 0.4 7.2 9.0 21.1 18.1 1.8
DJIA 26458 26.5 7.5 -2.2 13.4 25.1 1.9 9.0 7.0 18.9 17.1 2.1
NASDAQ 8046 38.3 13.4 5.7 7.5 28.2 -0.8 7.1 16.6 48.3 24.0 1.0
Europe 2949 18.0 1.2 3.9 0.7 21.2 0.0 -0.4 -6.2 16.2 14.1 3.6
Japan 3430 56.7 7.1 9.1 0.4 21.8 2.3 2.9 -0.2 14.2 13.5 2.1
Emerging Markets 1048 -5.0 -4.6 -17.0 8.6 34.3 -0.8 -2.0 -9.5 12.7 12.0 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 2013 2014 2015 2016 2017 MTD QTD YTD Instrument Current (%)
Global 2.22 -0.1 7.9 0.9 3.3 2.1 -0.5 -0.4 -0.1 10-Yr. U.S. Treasury 3.06
U.S. 3.47 -2.0 5.9 0.5 2.7 3.6 -0.7 0.0 -1.6 30-Yr. U.S. Treasury 3.21
Europe 0.81 2.1 11.2 1.1 3.3 0.5 -0.3 -0.8 -0.5 1-Yr. CD Rate 1.13
EM Sovereign 5.78 -6.2 7.1 0.6 9.6 9.8 2.1 2.3 -3.5 30-Yr. Fixed Mortgage 4.57
U.S. High Yield 6.62 7.2 1.8 -5.6 17.8 7.0 0.6 2.4 2.7 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 United States (S&P 500) at 9.0%; U.S. High Yield at 2.7%; Japan (MSCI Japan) at -0.2%; Euro Broad Investment Grade at -0.5%; U.S. Broad Investment Grade at -1.6%; EM Government Bond at -3.5%; Euro (Euro STOXX 50) at -6.2%; and Emerging Markets (MSCI EM) at -9.5%.
Sources:
Citi Research and Citi Personal Wealth Management as of September 30, 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 Consumer Discretionary at 20.6%; Information Technology at 20.6%; Healthcare at 16.6%; S&P 500 at 10.6%; Energy at 7.5%; Industrials at 4.8%; Utilities at 2.7%; Telecommunications at 0.8%; Financials at 0.1%; Materials at -2.7%; and Consumer Staples at -3.3%.
Sources:
Citi Research and Citi Personal Wealth Management as of September 30, 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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