Stocks continued to rally in April with global equities rising by an additional 3.2% - marking the fourth straight month of gains. In the U.S., both the S&P 500 and NASDAQ hit record highs with monthly gains of 3.9% and 4.7%, respectively. Outside of the U.S., European, Japanese, and Emerging Market shares returned 4.7%, 1.4%, and 2.0%, respectively. At this...
Stocks continued to rally in April with global equities rising by an additional 3.2% - marking the fourth straight month of gains. In the U.S., both the S&P 500 and NASDAQ hit record highs with monthly gains of 3.9% and 4.7%, respectively. Outside of the U.S., European, Japanese, and Emerging Market shares returned 4.7%, 1.4%, and 2.0%, respectively. At this stage, the dismal equity market performance in the fourth quarter seems a distant memory.
A static Federal Reserve, progressing U.S. - China trade talks, improving economic data, and better-than-expected corporate earnings have each contributed to recent equity market gains. However, there is still the potential for “showers” moving forward with the U.S. threatening to implement auto tariffs against the European Union and a rising risk that the U.S. - Mexico - Canada Agreement (USMCA) may fail to pass in Congress.
Citi’s Private Bank’s Global Investment Committee (GIC) is maintaining its overweight to global equities (+2.0%). Key overweights include allocations to both U.S. large-cap and emerging market stocks (particularly emerging Asia). The Committee remains neutral on global fixed income.
The U.S. economy experienced a persistent slowing in the back half of 2018, but rebounded to an annualized growth rate of 3.2% in the first quarter of 2019. After growing at a rate of 2.9% in 2018, our economists are now expecting the U.S. economy to grow by 2.7% in 2019. Slightly slower, but still above-potential. A healthy labor market should help to support consumer spending, which is the key driver of economic growth. Aside from the consumer, core capital goods orders in March also point to firmer business investment later this year.
Citi Private Bank’s Global Investment Committee maintains an overweight on U.S. large-cap shares. First quarter earnings season is still underway, but initial reports have been positive with 78% of companies beating earnings expectations by an average of 5.7% If this trend holds, the S&P 500 may be able to post a slight earnings increase on a year-over-year basis and avoid an “earnings recession.” However, we are expecting the pace of stock market gains to moderate later this year.
The Federal Reserve is now forecasting zero rate hikes in 2019 and just one rate hike in 2020. Against this backdrop, the GIC moved some of its short-term investment grade debt overweight into intermediate-term investment grade debt as better returns may be found with less interest rate risk than in the past.
Europe and Japan
The Brexit delay, improving financial conditions, and a tentative stabilization in China suggest that euro area growth may rebound later this year. However, near-term risks such as rising oil prices and U.S.-led auto tariffs could still hit the economy further. Citi’s economists are expecting the euro area to slow from a growth rate of 1.8% in 2018 to 1.0% in 2019. In Japan, growth appears to be slowing, but not sharply. Recent data indicate that the economy has probably avoided an immediate fall into recession., but a consumption tax hike in October may present a downside risk to growth. Citi’s economists are forecasting that year-on-year growth will fade from 0.8% in 2018 to 0.6% in 2019 and 0.1% in 2020.
Stocks (Europe: Slight Overweight / Japan: Neutral)
The GIC is slightly overweight European (ex-UK) stocks and neutral on Japanese large-cap shares. A stabilization in Chinese growth could lead to an uptick in European manufacturing in coming months. In Japan, there may be opportunities in select sectors like robotics and automation, but selectivity is key.
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 market economies are expected to grow by 4.5% in 2019 – the same rate as in 2018. There are some signs of stabilization in China with March data pointing to stable demand and strong production. As a result, Citi’s economists have revised up their GDP forecast for China to 6.6% year-on-year. A stabilization in Chinese growth may help the broader emerging Asia region as well.
The GIC is overweight emerging market equities. Emerging markets seem to be in a sweet spot due to a more dovish Fed and Chinese stimulus. In addition, estimated 2019 price-to-earnings ratios in the emerging world are much lower than in the developed world (12.8x versus 17.7x in the U.S.).
Bonds (Slightly Overweight)
We are overweight emerging market fixed income – in line with our equity position.
U.S. Stock Market and Economic Forecasts
|S&P 500 Target||2,507||2,850 - 2,950||N/A|
|S&P 500 P/E Ratio||15.43x||17.01x||16.01x|
|S&P 500 EPS Growth||22.20%||5.60%||11.80%|
Citi Research and Citi Personal Wealth Management as of March 28, 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
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||3.5||3.7||3.9||3.2||3.2||3.1||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||2014||2015||2016||2017||2018||MTD||QTD||YTD||Instrument||Current (%)|
|Global||1.85||7.9||0.9||3.3||2.1||0.5||-0.1||-0.1||2.6||10-Yr. U.S. Treasury||2.50|
|U.S.||2.98||5.9||0.5||2.7||3.6||0.0||0.0||0.0||3.0||30-Yr. U.S. Treasury||2.93|
|Europe||0.48||11.2||1.1||3.3||0.5||0.5||0.1||0.1||2.6||1-Yr. CD Rate||1.48|
|EM Sovereign||5.52||7.1||0.6||9.6||9.8||-4.1||0.2||0.2||6.2||30-Yr. Fixed Mortgage||4.04|
|U.S. High Yield||6.81||1.8||-5.6||17.8||7.0||-2.1||1.3||1.3||8.8||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)