A K-Shaped Recovery

The US equities market logged a strongly positive month with general market indexes hitting all-time highs in August. These milestones come after five consecutive positive months for all three U.S. market indexes, a run that would have seemed unthinkable in March. The Federal Reserve signaling low interest rates for the foreseeable future and progress on the COVID-19 vaccine front sowed optimism in August. Once again, the technology sector outpaced the general market, and travel & leisure stocks also logged gains in August, though they generally remain negative for the year.

The shape of the U.S. economic recovery has been discussed since lockdown measures have ebbed and flowed around the country. At this time, consensus is that the recovery is taking on a k-shape. What this means is that there is a divergence, similar to the right half of a “K.” Tech, large-cap and white-collar companies are benefiting from the “new normal” of accelerated adoption of technology in the workplace, education and consumer spending. While cyclicals, small and blue-collar companies are suffering from an inability to adapt quickly enough or an inherent inability to rely on technology to conduct business. U.S. equities are showing a similar divergence, which we have discussed at length, as large-cap and tech companies have shot higher and dragged the general market up while smaller-caps and non-tech companies lag. Expectations are that the k-shape will converge at some point, as the “new normal” economy is unsustainable and those companies that have suffered from the pandemic will recover as the medical crisis improves. At the same time, those companies that have benefited could see some headwinds for the same reasons: workers, consumers and educators relying less heavily on technology.

The next question is then, where are we in the pandemic? The daily cases reported in the US is still high, but some data points are improving. The majority of U.S. states currently have a transmission rate below 1, which implies a downward trend. There is also optimism regarding vaccines as a number of front-runners continue through testing phases. It should be noted that many vaccines do not make it through all testing phases and the timelines can be slow even when accelerated. A full convergence of this recovery may be some time in the future, but we are already seeing and expecting more of the negatively affected companies regaining strength.

The presidential election is already holding the attention of many investors and will continue to do so as we move closer to November. Volatility is likely to increase as the election nears. Futures are currently pointing to higher volatility in November than the average election year, based on CBOE VIX futures. We added slightly to both U.S. and international equity exposure in August while cycling into some names showing accelerated recovery. We are still seeing more attractive valuations and stability of the medical crisis internationally, particularly in the Eurozone.

By the Numbers*

U.S. Equities (S&P 500 Index) | 9.3%

International Equities (MSCI ACWI ex-U.S.) | -3.1%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | 6.9%

Global Bonds (JP Morgan Global Aggregate Bond Index) | 6.1%

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 8/30/2020. Data provided by Bloomberg, NorthCoast Asset Management.

*Source: Bloomberg, NorthCoast Asset Management.

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