Uncertain Outcomes: Election, Virus and Economy

The U.S. equity market was hit with bouts of volatility and negative price action in October as an uptick in domestic Covid-19 cases raised fears about another round of lockdown measures and further slowing of the U.S. economy. A handful of European countries have already experienced similar upticks, causing increased lockdown measures or serious lockdown reinstatement consideration. There are many factors that appear to be contributing to the increasing infections across the country, most notably an increase in social gatherings due to pandemic fatigue, the colder weather (particularly in the Northeast) forcing gatherings indoors and the return of students to college campuses.
 
The election also contributed to volatility as investors continued to position themselves for what is expected to be an unstable period for U.S. equities. One of the largest concerns for the market is a drawn-out election process caused by pandemic concerns, along with the possibility of contested results. Volatility is often a product of uncertainty, and uncertainty in such a divisive election would likely lead to high levels of volatility. These concerns cannot be considered independently from the pandemic. The recent uptick of cases has already put the U.S. market in a vulnerable position, with the S&P 500 down roughly -5.6% in the final week of October. We feel the election effect is more likely to be neutral in the near- to mid-term. However we do expect short-term volatility to continue, with additional opportunities as the dust settles.
There is little consensus on the direction of this week’s election, especially given the unwillingness of pundits to commit to a projection after the surprise results of 2016. The ideal scenario for the market is a smooth election process and deviations from that may cause some alarm. 
 
Unfortunately, the election results will not bring an end to any of the risks still facing U.S. equities. Even when one uncertainty is removed, the economy has still not recovered and is at risk of additional decline depending on the course of the recent spike in Covid-19 cases. We did lower the investment level of our U.S. tactical CAN SLIM® strategy in October to roughly 68%. Worsening pandemic risks were the main driver of the change but the timing continues to be strategic. We maintain that election results do not have much of an impact on the stock market, but rising risks have made equities more vulnerable to the expected volatility. We also decreased equity exposure in our CAN SLIM® International strategy as countries in Europe look to reinstate lockdowns.
 
We encourage you to reference our Q3 Newsletter in which we discussed our position on the election and provided some historical context. The coverage of what’s to come has been full of superlatives, but the narrative does not always match reality. Our management team does not chase storylines. We continue to rely on data, not narratives.

By the Numbers (Year-to-Date)*

U.S. Equities (S&P 500 Index) | 2.3%

International Equities (MSCI ACWI ex-U.S.) | -7.5%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | 6.3%

Global Bonds (JP Morgan Global Aggregate Bond Index) | 5.8%

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 10/31/2020. Data provided by Bloomberg, RBC, NorthCoast Asset Management.

*Source: Bloomberg, NorthCoast Asset Management.

Negative Indicator

Neutral Indicator

Positive Indicator

Neutral Indicator

Valuation

Our valuation indicators improved slightly from September to October, but they are still overwhelmingly negative for U.S. equities. Despite the pullback in prices, P/E ratios remain highly elevated at roughly 24. International valuations remain relatively more attractive.

Sentiment

Sentiment indicators were largely unchanged in September. The increase in U.S. Covid-19 cases has caused some concern of future lockdown measures leading to economic insecurity. The University of Michigan Consumer Sentiment Survey remained around the same levels as September.

Technical

Technical indicators remain positive despite a slight pullback from the negative market action. The S&P 500 still sits above its 200-day moving average (MA) and in-line with its 100-day MA. Volatility spiked at the end of October due to the increase of pandemic risk and ahead of the election. The spike is expected to sustain for the short-term and could provide good entry points in new positions.

Macroeconomic

The preliminary GDP reading for Q3 showed strong growth, 7.4% over Q2 at a 33.1% annualized growth rate. Annualized growth rate is slightly misleading due to the large swings caused by Covid-19. The strong growth is encouraging but the economy is still smaller than the end of last year. Increasing cases pose a threat to the recovery.
 

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.

PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS.

This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors, strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make any profit or will be able to avoid incurring substantial losses. Performance differences for certain investors may occur due to various factors, including timing of investment.  Investment return will fluctuate and may be volatile, especially over short time horizons.

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The investment views and market opinions/analyses expressed herein may not reflect those of NorthCoast as a whole and different views may be expressed based on different investment styles, objectives, views or philosophies. To the extent that these materials contain statements about the future, such statements are forward looking and subject to a number of risks and uncertainties.

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