The Ongoing Need for Caution

The S&P 500 rose 5.6% in July, buoyed by large tech names that rose thanks to positive Q2 earnings reports and guidance. Excluding the largest tech names, both earnings and price action have been mixed for S&P 500 companies. Earnings season has thus far exposed which companies are most exposed to the impacts of the pandemic. The forced digitization of society has pulled technological advancement and adoption forward at a faster pace than under normal circumstances. As a result, technology companies have outperformed and pulled general indexes higher. Public perception of these companies has also accelerated the price growth and contributed to their stocks trading at some of the highest multiples. But still, thanks to these tech giants the S&P 500 and the Dow Jones Industrial Average have logged four consecutive months of gains.

Notably, U.S. equities’ gains are in stark contrast to economic health. Data released in July showed that U.S. GDP fell at a 32.9% annual rate during the second quarter. This is the steepest decline since GDP has been tracked, back to 1947. Consumer spending had been the bellwether of economic growth in recent years, and it dropped significantly during the second quarter. Much of the economic contraction was expected and in fact the drop in GDP growth was less severe than economists’ expectations. However, the recent rise in coronavirus cases in the U.S. has caused increased concerns of lockdown reinstatements and observable decreases in consumer spending in recent weeks. The economy is predicted to turn around during the third quarter, but this recent spike could hamper the recovery. In order to help us monitor economic data as completely as possible, we have integrated several unique data sets in to our review process, including mobility and lockdown data. This gives us a more comprehensive, detailed and real-time impression of conditions. President and CEO Dan Kraninger discussed these in the recent Q2 newsletter, which you can access HERE.

The most immediate matters likely to move the markets are the increasing coronavirus cases and the debate over federal stimulus. Both could negatively impact consumer spending, which has far reaching implications on both the economy overall and individual stocks. Our current investment level points to an opportunistic view of the market. We continue to choose our moves wisely, taking advantage of sudden market shifts to the upside. In recent weeks, generally positive market moves have confirmed our macro view. Our current investment levels remain roughly the same as last month however we continue to view incoming data cautiously. In addition to the immediate risks discussed above, more persistent threats remain such as the upcoming election and tension between the U.S. and China. While we are seeking opportunities for growth, we are equally aware of the ongoing need for caution.

By the Numbers*

U.S. Equities (S&P 500 Index) | 2.0%

International Equities (MSCI ACWI ex-U.S.) | -7.0%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | 7.7%

Global Bonds (JP Morgan Global Aggregate Bond Index) | 6.3%

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 7/30/2020. Data provided by Bloomberg, NorthCoast Asset Management.

*Source: Bloomberg, NorthCoast Asset Management.

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.

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