Pockets of Optimism

Equity markets got a boost during the month of April despite negative economic data and continued shutdowns of nonessential businesses in most states. Most of the positive moves came from companies expected to be more resilient throughout the pandemic. Towards the end of the month, however, optimism spread to companies less well equipped to handle the slumping economic activity. For example, we saw positive price movement in larger cruise lines, which are expected to be some of the most heavily impacted throughout the pandemic. This may be a sign that some investors are optimistic about a v-shaped, rapid recovery. We’ve noted these gains as positive and not wholly unexpected, but we believe it is too early for sentiment-driven blanket buying. Gains have also been weighted toward larger corporations, specifically the technology sector, which appears driven mostly by sentiment.

Our Macroeconomic indicators have moved negative after the release of updated data. The U.S. economy contracted in the first quarter at an annualized rate of 4.8%. Not only was this contraction the largest since the last recession, but it also ended the longest period of economic expansion on record. Consumer spending had been the driver of economic expansion for the past 6 quarters, and it fell by a record 7.5% in March. Much of the decrease occurred in the second half of March, when stay-at-home orders were fully enforced. The economic data from April is expected to be worse with consumers having already stock-piled goods in March and initial jobless claims reaching roughly 30 million.

There was some optimism to come out of the month of April. Several drug therapy trials are underway with some positive progress. Reports show that healthcare systems are becoming less burdened by Covid-19, which is a good sign for current conditions and readiness should cases rise again. A number of states are also beginning to loosen their stay-at-home orders and will allow nonessential businesses to resume operation while maintaining social-distancing rules. Our data is not showing a v-shaped U.S. recovery in the short-term. While it has felt like an extended period of economic stress, the full impacts of the economic lockdowns have yet to be seen. As such, we took advantage of the recent price movements to raise some additional cash in our tactical U.S. strategy. International economies appear to be ahead of the U.S. and could therefore recover sooner, so we are more optimistic in our international tactical equity strategy.

By the Numbers*

U.S. Equities (S&P 500 Index) | -9.5%

International Equities (MSCI ACWI ex-U.S.) | -17.6%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | 5.0%

Global Bonds (JP Morgan Global Aggregate Bond Index) | 1.6%

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 4/30/2020. Data provided by Bloomberg, NorthCoast Asset Management.

*Source: Bloomberg, NorthCoast Asset Management.

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