Stocks across most markets experienced solid gains in June with the MSCI All Country World Index rising another 3.0%. In the United States, the S&P 500 edged 1.8% higher while the tech-heavy NASDAQ jumped 6.0% These gains helped the Dow Jones...
Stocks across most markets experienced solid gains in June with the MSCI All Country World Index rising another 3.0%. In the United States, the S&P 500 edged 1.8% higher while the tech-heavy NASDAQ jumped 6.0% These gains helped the Dow Jones to log its best quarterly performance since 1987 – rising 17.8%. The 10-year U.S. Treasury yield was little changed.
The rally in U.S. stocks may have taken a pause of late, but U.S. economic data did not. Both retail sales and orders for durable goods in May surprised to the upside and early June readings on consumer confidence suggest a more upbeat consumer. We will be watching to see if these trends continue in July as the recent surge in COVID-19 cases could dampen economic activity some.
Citi Private Bank’s Global Investment Committee (GIC) maintains an overweight on global equities, including U.S. small-cap shares, and select emerging markets (in Asia and Latin America). European shares have been moved from an underweight to a neutral weighting. The GIC moderately reduced its overweight in U.S. Treasuries to fund an overweight on select U.S. real estate investment trusts (REITS).
The U.S. economy is already in a deep, but likely short recession with second quarter growth set to plunge by about 28% on an annualized basis according to Citi’s economists. Fortunately, the economy has likely already bottomed in either mid-April or early May. Third quarter growth should surge as states reopen, but path ahead looks bumpy and a full recovery in GDP levels may take well into 2021. We do not expect the renewed rise in COVID-19 cases to lead to a second period of economic contraction.
Stocks (Neutral; Overweight SMID)
Citi Private Bank’s Global Investment Committee maintains a neutral position on large-cap U.S. stocks, but is overweight U.S. small- and mid-cap shares (SMID). Small cap shares may play “catch-up” as the economy exits recession. Over the 12- to 18-month time horizon, we expect cyclical industries like banks and industrials to recover as well. That said, we would not be at all surprised to see markets experience a pullback or a correction along the way given how far markets have come since March 23rd.
The Federal Reserve’s balance sheet has expanded by about $3 trillion over the past 3 months. After the Global Financial Crisis, it took nearly six years to expand the balance sheet by the same amount. Citi’s GIC maintains an overweight on short- and intermediate-duration Treasuries, but is neutral on long-duration. Although the Committee did recently reduce the size of its overweight in U.S. Treasuries and investment grade corporate bonds to fund an overweight position in U.S. residential REITS and commercial mortgage REITS. The GIC remains neutral on municipal bonds.
Europe and Japan
Economy (Europe: Slowing / Japan: Slowing)
Citi’s economists upgraded their 2020 Euro Area growth forecast from -7.0% to -6.7% as a lifting of restrictions should foster a strong rebound in the second half of 2020. In Japan, 2020 growth has been revised upward from -7.1% to -5.2%, reflecting stronger-than-expected household spending.
Stocks (Europe: Neutral / Japan: Neutral)
The GIC closed its underweight and is now neutral on both developed and emerging Europe as the European Union appears increasingly likely to rally behind a stronger fiscal expansion in the coming year. In Japan, we see strong fiscal policy and public health measures leading to rapid normalization, but we see better opportunities elsewhere.
The GIC is maintaining a deep underweight on both European and Japanese sovereign bonds.
The economic outlook for emerging markets looks better than many industrial economies with 2020 growth likely to fall -1.5% (versus -5.0% for industrial countries). In Latin America, which is struggling to contain COVID-19, declines are likely to be steep. Mexico’s GDP is expected to decline by -9.0% in 2020 while Brazil’s economy may decline by -6.5%. China may grow by just 2.4% this year.
The GIC is overweight emerging markets (Asia and Latin America). As China continues to climb out of the economic declines seen in February, equities in Asia are likely to remain somewhat more resilient. Returns in Latin America have lagged other regions year-to-date and we expect the region to perform well when the economic recovery begins in earnest.
We are overweight emerging market fixed income as U.S. dollar-denominated debt valuations reflect poor fundamentals, but also long-term opportunities and attractive risk adjusted returns.
U.S. Stock Market and Economic Forecasts
|S&P 500 Target||2,507||3,231||2,700|
|S&P 500 P/E Ratio||15.43x||18.97x||24.67x|
|S&P 500 EPS Growth||22.5%||2.0%||-24.0%|
Global Economic Forecasts
|Region||GDP Growth||CPI Inflation||10-Year Yields||Exchange Rate vs. USD|
|Based on PPP Weights||3.0||-3.0||5.8||3.2||2.5||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||2015||2016||2017||2018||2019||MTD||QTD||YTD||Instrument||Current (%)|
|Global||0.75||0.9||3.3||2.1||0.5||7.1||0.6||2.4||4.0||10-Yr. U.S. Treasury||0.66|
|U.S.||1.20||0.5||2.7||3.6||0.0||8.9||0.7||3.0||6.2||30-Yr. U.S. Treasury||1.41|
|Europe||0.20||1.1||3.3||0.5||0.5||6.0||1.0||2.5||1.3||1-Yr. CD Rate||0.49|
|EM Sovereign||4.75||0.6||9.6||9.8||-4.1||14.8||3.1||12.0||-2.6||30-Yr. Fixed Mortgage||3.27|
|U.S. High Yield||7.23||-5.6||17.8||7.0||-2.1||14.1||0.9||9.6||-4.8||Prime Rate||3.25|
Asset Class Returns (Sorted by Performance)