Things Are Looking Brighter
For the month of May, stocks posted mixed results in a relatively volatile month of trading with the Dow and the S&P 500 gaining 1.9% and 0.6%, respectively, while tech-heavy Nasdaq, however, suffered a 1.5% loss. Leadership in the S&P 500 has been cyclical in May with energy and financials being the top performing sectors, returning 5.8% and 4.8% respectively. Consumer discretionary and technology sectors both lost grounds, posting negative returns of -3.8% and -0.9% respectively.
Much of the recent volatility was caused by investors’ concerns that the uptick in activities after reopening might generate a surge in inflation that might ultimately lead to less accommodative Fed’s policy. The headline CPI rose 4.2% YOY in April, with base effects contributing to some of the acceleration. Although the CPI rose more than expected by 0.8% on a monthly basis, the details highlight the transitory nature of the acceleration. On the demand side: the reopening of the economy and fiscal stimulus are two of the major drivers of some of the spikes in prices. We expect that labor scarcity and risks of wage inflation should ease later this year with the September expiration of COVID-related unemployment insurance programs and more people back to the labor market as infections decline.
The Fed’s April minutes released in the middle of the month reinforced that most committee members did not think tapering or rate hikes were needed in the near future, as “participants generally noted that the economy remained far from the Committee’s maximum-employment and price-stability goals”. We did noticed, however, that the Fed officials hinted for the first time “it might be appropriate at some point” to consider tapering asset purchases if the economy shows “rapid” progress.
Some macroeconomic and sentiment data softened slightly after record high levels last month, but we don’t believe this signals that the economy is moderating. The ISM manufacturing index fell from 64.7 in March to 60.7 in April, but it remains elevated and the outlook is favorable for factory conditions this quarter. Retail sales changed only marginally in April, but coming after the nearly unprecedented growth in March, it left the level of sales very high, and we believe that the overall trend of healthy consumer spending will continue with strong job growth and reduced restrictions on activities.
Market technicals remained positive as many over-crowded trades have been partially unwound. Also, valuations improved marginally with both trailing and forward P/E modestly decreased. We have slightly increased our investment level to 81% in U.S. equities as the market pulled back in the middle of the month. Valuations internationally remain relatively more attractive are we are 88% invested in our flagship international strategy.
U.S. Equities (S&P 500 Index) | 12.4%
International Equities (MSCI ACWI ex-U.S.) | 9.8%
U.S. Bonds (Barclays U.S. Aggregate Bond Index) | -2.3%
Global Bonds (JP Morgan Global Aggregate Bond Index) | -2.5%
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 5/31/2021. Data provided by Bloomberg, NorthCoast Asset Management.
*Source: Bloomberg, WSJ, NorthCoast Asset Management.
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Valuation With market ending modestly higher this month, valuations for equity improved marginally, but still appear overvalued. P/E ratios decreased to 29.8 at the end of May from 29.9 at the end of March. Forward P/E ratio also decreased slightly. Inflation adjusted valuation metrics continued to be negative with inflation rising. |
Sentiment Consumer sentiment dropped in May with inflation fears as the University of Michigan consumer sentiment index came in at 82.9, down from 88.3 in April. Confidence is under pressure with stimulus starting to fade and gasoline prices moving higher, but wealth remains healthy with massive saving, decreasing debt and accelerating housing price. PMI index fell slightly, but remains elevated above 60. |
Technical Technical indicators remain positive but look stretched. At the end of April, the S&P 500 was 12% above its 200-day moving average, 5% above the 100-day average and 2% above the 50-day average. Volatility spiked with VIX index reaching to 27.6 in the second week of the month, but came down and settled at 16.8, compared with 18.6 at the end of last month. |
Macroeconomic Labor market continued to improve with weekly initial jobless claims fell for four consecutive weeks and reached closest to pre-pandemic level, though the payroll employment was weaker than expected. Industrial production rose 0.7% following a 2.4% gain in March. U.S. manufacturing seems to have weathered the global semiconductor shortage reasonably well and the near-term outlook remains favorable. Inflation remains risk with the core PCE price index increased 3.1% YOY. |
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