A Great Divide – The Economy vs. The Market

Equities had another positive month in May, which contributed to the S&P 500 having its best two-month performance since 2009. As states begin to reopen their economies and loosen restrictions on in-person businesses such as restaurants, stores and events, investors have demonstrated optimism about the economic recovery. The equities rally was initially strongest in the technology sector as the tech-heavy Nasdaq rose 6.8% in May and is positive year-to-date. Some tech companies could be more resilient thanks to their lack of reliance on in-person transactions and tendency to benefit from increased investor sentiment. As the rally continued throughout May it extended to other sectors, primarily financials, which outpaced the tech sector in the latter half of the month. This shift may signal that investors believe the recovery will be more broad-based than sector-specific. Despite the proverbial “green-on-the-screen” and the generally positive rhetoric concerning equities, there are more than a few new and old risks.

As a result of the positive market action equity prices have returned to pre-pandemic levels, but earnings expectations and guidance have been significantly lowered. When prices were last at these current levels, earnings guidance showed growth – it now shows a contraction. So, while prices appear to be returning to previously normal levels, they are relatively more expensive with price-to-earnings ratios closer to the dot-com bubble rather than the end of the most recent bull market. It is also important to keep in mind that with interest rates and bond yields historically low, investors that may have invested in safe-haven assets could instead be buying into equities, propping up the elevated prices. Additional geo-political market volatility was also introduced, with the U.S. and China having clashed recently over China’s handling of the Coronavirus and its more aggressive governance of Hong Kong. The two governments have traded heated rhetoric and some actions have been taken on both sides, but the first phase of the recent trade agreement is still intact.

The reopening of state economies and resultant positive market actions are refreshing after the tough start to the year. However, we currently hold a cautious stance regarding U.S. equities. NorthCoast maintains a strictly quantitative view of the markets so as not to be distracted by sentiment-driven momentum. The risks discussed above are new, but we still have major concerns about the U.S. economic recovery, how long it will take and what the lasting damages will be. Our macroeconomic indicators remain depressed and though sentiment has improved slightly, valuation indicators have deteriorated. We remain roughly 64% invested in our flagship U.S. tactical equity strategy and slightly decreased our international strategy’s investment level.

By the Numbers*

U.S. Equities (S&P 500 Index) | -5.2%

International Equities (MSCI ACWI ex-U.S.) | -14.9%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | 5.5%

Global Bonds (JP Morgan Global Aggregate Bond Index) | 2.1%

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 5/31/2020. Data provided by Bloomberg, NorthCoast Asset Management.

*Source: Bloomberg, NorthCoast Asset Management.

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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.

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