After a brief meltdown in May, global stocks regained their footing as U.S. – China trade tensions thawed and the Federal Reserve signaled easier monetary policy. Globally, stocks pushed 6.4% higher with European shares leading the way with a 8.2% gain. In the United States, stocks experienced similarly-sized gains with the S&P 500 adding 6.9% in the month...
After a brief meltdown in May, global stocks regained their footing as U.S. – China trade tensions thawed and the Federal Reserve signaled easier monetary policy. Globally, stocks pushed 6.4% higher with European shares leading the way with a 8.2% gain. In the United States, stocks experienced similarly-sized gains with the S&P 500 adding 6.9% in the month. The areas most exposed to trade like the tech-heavy NASDAQ and emerging markets also saw relief – rising 7.4% and 5.7%, respectively.
Trade tensions remain unresolved, but having both sides back at the negotiating table is an improvement. Uncertainty on the final outcome remains high, but most investors appear optimistic that a deal will eventually be struck. With trade issues sidelined for now, the market’s focus will be on the Federal Reserve. It is widely expected that the Fed will cut rates at its July 31 meeting, but it is not yet a guarantee. Incoming economic data will be a driving factor.
Citi’s Private Bank’s Global Investment Committee (GIC) maintains a slight underweight on global stocks. After the decision, The GIC’s global stock allocation is 2.0% underweight, global fixed income is 1.5% overweight and cash is 0.5% overweight.
With about two-thirds of the required economic data having been reported, our tracking models point to about 2.3% real GDP growth in the second quarter. While slower than the 3.1% pace logged in the first quarter, the underlying drivers of growth (like consumer spending) should show improvement. For the full year, Citi’s economists expect the U.S. economy to grow by about 2.6% year-on-year in 2019 (versus 2.9% in 2018). Heading into 2020, growth could ease further as fiscal stimulus fades.
Citi Private Bank’s Global Investment Committee remains underweight U.S. large-cap stocks. Trade tensions have eased between the U.S. and China, but much of this was likely priced in during the impressive June rally. Moving forward, our focus will be on incoming economic data and second quarter earnings season. We think that cyclical sluggishness may weigh on earnings in the second half. If accurate, this could pull the market back towards Citi’s year-end S&P 500 target of 2,850.
The Federal Reserve appears to be moving towards a rate cut. Most investors are expecting the Fed to cut rates by at least 25 basis points at their July 31st meeting. If the Fed does cut, it will likely be in response to a deterioration in economic data, which would seemingly favor fixed income. The GIC remains overweight cash, short-, intermediate-, and long-duration U.S. Treasuries.
Europe and Japan
Lower oil prices and softness in economic activity during the second quarter led Citi’s economists to slightly lower their 2019 forecast from 1.2% to 1.1%. However, fresh monetary stimulus from the European Central Bank could lead to a modest improvement in 2020. In Japan, growth estimates have been brought down slightly – lowered 0.1% to 0.6% for 2019. The outlook for 2020 remains uncertain as Prime Minister Abe’s decision on whether or not to postpone a tax hike in October is dependent on U.S. – China trade developments. Currently, Citi is looking for just 0.1% growth in 2020.
Stocks (Europe: Neutral / Japan: Slight Underweight)
The GIC maintains a neutral stance on European (ex-UK) stocks. Even though valuations look reasonable, European exporters may be exposed to the ongoing trade tensions and Brexit remains a viable risk in the second half of this year. In Japan, there may be opportunities in certain sectors like robotics and automation, but selectivity is key.
We still see the yields on most European and Japanese sovereign bonds as unacceptable. There appears to be better opportunities elsewhere.
Emerging market economies are expected to slow from 4.5% in 2018 to 4.3% in 2019. Economic data in China remained weak in May; however, there may be more calls for policy support which should help to stabilize growth. Avoiding the next U.S. round of tariffs should also help. Elsewhere in the region, Vietnam, Korea and Taiwan may benefit from a shift in supply chains. In Latin America, a string of negative economic data have caused growth estimates to be lowered slightly.
Stocks (Slight Overweight)
The GIC is overweight emerging market equities. Easing trade tensions and loose monetary policy in the U.S. should help to boost shares. Also, long-term growth prospects and valuations appear much better than in developed markets. We believe investors should focus on long-term trends.
Bonds (Slightly Overweight)
We are overweight emerging market fixed income – specifically in emerging Asia and Latin America.
U.S. Stock Market and Economic Forecasts
|S&P 500 Target||2,507||2,850||Mid-Year: 3,000|
|S&P 500 P/E Ratio||15.43x||17.21x||16.39x|
|S&P 500 EPS Growth||22.5%||4.4%||5.0%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||3.4||3.5||3.8||3.1||3.2||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||2014||2015||2016||2017||2018||MTD||QTD||YTD||Instrument||Current (%)|
|Global||1.50||7.9||0.9||3.3||2.1||0.5||1.3||2.7||5.5||10-Yr. U.S. Treasury||2.01|
|U.S.||2.53||5.9||0.5||2.7||3.6||0.0||1.2||3.1||6.1||30-Yr. U.S. Treasury||2.53|
|Europe||0.24||11.2||1.1||3.3||0.5||0.5||1.9||2.9||5.4||1-Yr. CD Rate||1.49|
|EM Sovereign||5.02||7.1||0.6||9.6||9.8||-4.1||4.0||4.7||11.0||30-Yr. Fixed Mortgage||3.80|
|U.S. High Yield||6.54||1.8||-5.6||17.8||7.0||-2.1||2.4||2.4||9.9||Prime Rate||5.50|
Asset Class Returns (Sorted by Performance)