A Convergent Economy

U.S. equities logged major gains in November after three potential vaccines were shown to be remarkably effective in trial studies. Though each vaccine still has to go through emergency FDA approval, the mass distribution and administering pose the next challenge and makes the timeline for general population availability uncertain. Regardless, the end to the pandemic is now coming into view and the market’s reaction was overwhelmingly positive. Uncertainty regarding the presidential election also dissipated during the month with President-Elect Biden being granted permission to begin the transition into office. Subsequently the Dow Jones Industrial Average had its best month since January of 1987, and the S&P 500 gained almost 11%. Unlike most of the gains this year, November’s were not exclusive to blue-chips and tech stocks as the broader market has begun catching up to the tech sector that had carried the general market throughout much of this year. The rotation from growth stocks to value stocks has been happening since early September. From late March after the initial pandemic selloff to the end of August, the five largest stocks in the S&P 500 outperformed the smallest 495 stocks by 20.5%. Since 9/2 however, the smallest 495 have outperformed the largest 5 by 10.8%. This healthy rotation is showing us increasing confidence in a broadening recovery in the next year.
 
In September, we discussed the K-shaped recovery and the likelihood that the divergence at the right side of the “K” between technology, the “new normal economy,” and smaller-cap companies would eventually slow then converge. With a broad recovery looking more likely thanks to the vaccines, that convergence appears to be happening. Now, many expect a steep recovery that then flattens out, which has been called a square-root shaped recovery.
 
We do expect hiccups and even setbacks moving forward. Vaccine distribution will be logistically challenging and there will likely be some issues with implementation. We have been waiting for a more broad recovery in equities and expect the rotation into value to continue in the near-term. With the uncertainty surrounding the election settling down and the vaccine distribution only waiting on Federal approval, we are looking toward what’s next. In the short term, there are still many risks facing equities as U.S. case counts are rising quickly and lockdown measures may again be put in place before the vaccines can be widely distributed. We slightly increased exposure in both our domestic and international tactical flagships, and traded more heavily into names that provide exposure to the recovery

By the Numbers (Year-to-Date)*

U.S. Equities (S&P 500 Index) | 13.4%

International Equities (MSCI ACWI ex-U.S.) | 5.0%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | 7.4%

Global Bonds (JP Morgan Global Aggregate Bond Index) | 7.8%

The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. equity outlook.  This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies.

As of 11/30/2020. Data provided by Bloomberg, RBC, NorthCoast Asset Management.

*Source: Bloomberg, NorthCoast Asset Management.

Negative Indicator

Neutral Indicator

Positive Indicator

Positive Indicator

Valuation

The market gains in November pushed valuation indicators more negative than the prior month. The rotation into value stocks are pushing those valuations higher but they are still at more attractive entry points than growth stocks. P/E ratio rose to 28.4 from 25.8.

Sentiment

Sentiment regarding equities and economic activity certainly jumped in November off of vaccine news. However, consumer sentiment actually weakened according to the University of Michigan Consumer Sentiment survey. This negative change reflects the immediate reality of increasing Covid-19 cases.

Technical

Technical indicators remained relatively steady compared with the end of October. While momentum turned positive and the S&P 500 sits well above its moving averages, reversal indicators are flashing orange and red after such a steep run-up. Volatility did calm thanks to the election seemingly confirmed and certainly the vaccine news.

Macroeconomic

Data released in November showed that consumer spending grew in October by a modest 0.5%. Below September’s growth rate, it still shows the economy recovering from springtime losses. The uptick in cases however, has led to increasing jobless claims and worry of lockdowns prior to vaccine distribution. Forecasts show slowing growth in Q4.
 

Important Disclosures

The information contained herein has been prepared by NorthCoast Asset Management LLC (“NorthCoast”) on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. NorthCoast has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information, and are subject to change at any time without notice and with no obligation to update. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by NorthCoast. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NorthCoast. NorthCoast does not represent, warrant or guarantee that this information is suitable for any investment purpose and it should not be used as a basis for investment decisions. © 2020 NorthCoast Asset Management LLC.

PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS.

This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors, strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make any profit or will be able to avoid incurring substantial losses. Performance differences for certain investors may occur due to various factors, including timing of investment.  Investment return will fluctuate and may be volatile, especially over short time horizons.

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