Monthly Market Snapshot: May 2021
The old market adage of “Sell in May and Go Away,” did not happen. To the contrary, global equities actually rose 1.4% in the month. In the United States, the Dow Jones rallied 1.9% as cyclical shares rose while the NASDAQ slipped 1.5% as investors trimmed positions. The S&P 500 eked out a 0.5% gain. Europe outperformed with shares rising by 3.2% while Japanese shares climbed by 1.5%. The 10-year U.S. Treasury yield was largely unchanged during the month – falling from 1.63% to 1.59%. Fixed income returns were slightly positive for the month, but remain modestly negative year-to-date.
Investors remain focused on U.S. employment and inflation data as they attempt to determine the future path of Federal Reserve policy. The strength or weakness of the incoming data will likely determine the timing of the Fed’s decision to taper its asset purchases. The most likely timeframe remains late 2021 or early 2022. Labor market distortions are adding to the uncertainty.
After reducing its equity allocation slightly last month and taking other portfolio actions in anticipation of higher market volatility, Citi’s Global Investment Committee (GIC) left its asset allocation unchanged at its May 19 meeting. Our overweight to Global Equity and REITS remains at +8%. Fixed Income and Cash remains at -8%.
The U.S. economy grew by annualized rate of 6.4% in the first quarter of 2021 and is on track to expand by just over 10% annualized in the second quarter. A sustained rebound in service sector activity is well underway with over 50% of U.S. adults having received at least one dose of vaccine. The labor market continues to improve, but the weaker April jobs print has left investors questioning if pandemic benefits are leading to labor shortages – despite elevated unemployment levels. Labor shortages should ease as more states end pandemic unemployment insurance programs. An initial draft of an infrastructure bill (or bills) should be available soon. The cost of these plans will likely be partially offset by higher taxes.
Stocks (Neutral Large-Cap; Underweight SMID)
Citi’s Global Investment Committee (GIC) maintains a neutral position on U.S. stocks, but lowered its allocation to large-cap stocks during its previous meeting in a step towards de-risking. Small- and middle-cap (SMID) stocks are an underweight in the portfolio. We prefer value and cyclically-oriented names over the next few quarters as the economy normalizes and interest rates likely grind higher. Eventually, we envision a shift in portfolios that is more in line with mid-cycle economic conditions, but we do not believe we are there just yet.
The GIC is underweight short-term U.S. Treasuries, neutral intermediate- and long-dated Treasuries, and overweight U.S. Treasury-Inflation-Protected Securities (TIPS). In the next few months, we expect to hear from the Fed that they intend to taper asset purchases in the near future. We expect a range of 1.50%-2.00% in 2021 for the 10-year U.S. Treasury yield, but see it trending toward 2.50% in future expansion years. For taxable US investors, muni yields are attractive relative to other taxable high-quality bonds.
Europe and Japan
Economy (Europe: Recovering / Japan: Recovering)
The acceleration of vaccinations amid supportive government policy should lead to a resurgence in economic activity in the second half of 2021. Citi Research’s economists do not see inflation as a concern. The 2021 GDP forecast has been lifted by 0.8% to 4.2%. In Japan, the 2021 forecast has been raised by 0.4% to 2.0% to reflect a smaller-than-expected supply chain shock.
Stocks (Europe: Overweight; Neutral SMID / Japan: Neutral)
The GIC maintains an overweight on UK equities, but is largely neutral Europe ex UK. The GIC is also neutral on Japan large-caps. Non-U.S. small- and mid-cap stocks (SMID) are considered a neutral or slight underweight as well. In the UK, the end of a long period of Brexit uncertainty is raising confidence in an independent Great Britain and valuations remain cheap. An improved COVID response may be the first indicator of economic recovery.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Citi Research expects emerging market economies to rebound from a -1.7% decline to 6.5% growth in 2021. Asia is expected to grow by 7.8% in 2021 while Latin America is expected to grow by 5.1%.
Stocks (Overweight Asia and Latin America; Neutral China; Underweight EMEA)
The GIC is overweight emerging markets (Asia ex China and Latin America), but China remains a neutral weighting. Regions like Latin America should recover as vaccines start to reach emerging markets. The longer-term outlook looks more cautious beyond the potential global equity rebound over the next year.
Bonds (Overweight Asia; Neutral EMEA and Latin America)
The GIC maintains an overweight on emerging market fixed income, specifically Asia. In local bonds, future returns may be driven by foreign exchange movements.
U.S. Stock Market and Economic Forecasts
|S&P 500 Target||3,231||3,300||4,000|
|S&P 500 P/E Ratio||18.97x||27.43x||22.83x|
|S&P 500 EPS Growth||2.0%||-13.3%||21.2%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||-3.3||6.0||4.2||2.8||3.9||3.3||N/A||N/A||N/A||N/A||N/A||N/A|
|Equity Returns (%)||Valuations||Div. Yld. (%)|
|Fixed Income Returns (%)||Other Key Rates|
|Fixed Income||YTM||2016||2017||2018||2019||2020||MTD||QTD||YTD||Instrument||Current (%)|
|Global||0.91||3.3||2.1||0.5||7.1||5.7||0.1||0.4||-2.4||10-Yr. U.S. Treasury||1.59|
|U.S.||1.50||2.7||3.6||0.0||8.9||7.7||0.2||1.1||-2.4||30-Yr. U.S. Treasury||2.28|
|Europe||0.12||3.3||0.5||0.5||6.0||4.1||-0.1||-0.8||-2.6||1-Yr. CD Rate||0.29|
|EM Sovereign||4.52||9.6||9.8||-4.1||14.8||5.4||1.3||3.7||-2.5||30-Yr. Fixed Mortgage||3.10|
|U.S. High Yield||4.82||17.8||7.0||-2.1||14.1||6.3||0.3||1.3||2.3||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)