Monthly Market Snapshot: March 2021
Long-duration interest rates in the U.S. continued to climb higher in March. In the United States, the Dow Jones jumped 6.6% as confidence in the economic outlook gained steam. The S&P 500 rose 4.2% while the tech-heavy and interest-rate sensitive NASDAQ continued to lag with a 0.4% gain as the yield curve steepened. The nominal 10-year U.S. Treasury yield rose rapidly from 1.40% to 1.74% by month end.
The Federal Reserve seems satisfied with its current policy stance and is waiting to see actual economic data before changing its stance. However, financial markets will not wait for actual data to price in rising growth and inflation expectations. Technology shares have been sensitive to the rise in real yields as the space is often considered a long-duration asset. While Covid jitters have caused the rotation into Value stocks to pause some, we think the rotation has further room to run.
Citi Private Bank’s Global Investment Committee (GIC) made several asset allocation changes. The GIC decided to slightly increase its overweight to both UK stocks and U.S. Treasury-Inflation-Protected Securities (or TIPS). Gold was moved from an overweight to a neutral.
Citi’s economists expect activity to rebound to pre-COVID levels in the next couple of quarters with the unemployment rate falling to 4.4% by year-end. Though the path of the economy is highly dependent on the path of the virus and that poses some risk to optimistic views. The $1.9 trillion fiscal stimulus package is likely first of several initiatives. The Biden Administration will likely have solidified its plan to change the tax code and implement an infrastructure plan towards the end of the year. We envision higher inflation prints ahead, but think that inflation will moderate some in 2022.
Citi Private Bank’s Global Investment Committee is neutral on U.S. stocks. After putting in place an overweight on small- and mid-cap shares (SMID) back in April 2020, the Committee moved back to a neutral in January after the asset class nearly doubled. Stimulus from the Fed and U.S. congress will provide continued economic support, but valuations appear full. We think that the rotation into Value stocks likely has further room to run, but Growth stocks will likely remain attractive over the longer-run. Cyclical sectors like Industrials, Energy, Financials, and REITS should benefit from the recovery.
The GIC is underweight short-term U.S. Treasuries and neutral intermediate- and long-dated Treasuries. The Committee decided to increase its overweight to US Treasury-Inflation-Protected Securities (TIPS). Overall, we expect rates to trend higher on a 2021 cyclical recovery and higher U.S. debt burdens with the 10-year Treasury yield reaching 2.5% in coming years. For taxable U.S. investors, muni yields are attractive relative to other taxable high-quality bonds.
Europe and Japan
Economy (Europe: Contracting / Japan: Recovering)
Citi’s economists expect a negative real GDP print for the Euro Area in the first quarter. However, vaccinations should allow for more robust activity in following three quarters. As a result, the 2021 GDP forecast has been revised up 0.4% to 4.0%. In Japan, Citi’s economists revised up their 2021 forecasts by 0.1% to 1.9%. Herd immunity could possibly be reached in early 2022 and lead to even stronger growth then (currently penciled in at 2.8%).
Stocks (Europe: Overweight; Overweight SMID / Japan: Overweight; Overweight SMID)
The GIC maintains an overweight on both Europe and Japan large-caps, as well as small- and mid-cap stocks (SMID). At its March meeting, the Committee added further to UK equities with valuations much more reasonable than the U.S. The region also has a noticeable exposure to energy and financial companies, which should benefit from higher yields. Technology stocks, on the other hand, account for just about a 1.3% weight in the FTSE 100.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
Citi expects emerging market economies to rebound from -1.7% growth to 6.4% growth in 2021. The Asian region is expected to grow by 7.6% in 2021 while Latin America is expected to grow by 4.5%.
The GIC is overweight emerging markets (Asia and Latin America), but moved to a neutral on China as shares have already climbed significantly. Regions like Latin America may play catch up as shares have severely underperformed relative to other markets. The longer-term outlook looks more cautious.
The GIC has resumed an overweight on emerging market fixed income as valuations still look relatively attractive when compared to U.S. corporates. 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||3,800|
|S&P 500 P/E Ratio||18.97x||27.43x||22.96x|
|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||4.1||2.8||3.5||3.2||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||0.53||3.3||2.1||0.5||7.1||5.7||-0.4||-2.8||-2.8||10-Yr. U.S. Treasury||1.74|
|U.S.||1.01||2.7||3.6||0.0||8.9||7.7||-1.1||-3.5||-3.5||30-Yr. U.S. Treasury||2.41|
|Europe||-0.13||3.3||0.5||0.5||6.0||4.1||0.1||-1.9||-1.9||1-Yr. CD Rate||0.33|
|EM Sovereign||4.16||9.6||9.8||-4.1||14.8||5.4||-1.8||-6.0||-6.0||30-Yr. Fixed Mortgage||3.27|
|U.S. High Yield||5.05||17.8||7.0||-2.1||14.1||6.3||0.3||0.9||0.9||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)