Economic Recovery and Equity Rotation

The up-and-down Q1 2021 closed out on a positive note with U.S. equities booking gains, the S&P 500 +4.3% in March. That being said, the first quarter was not quite the return to normalcy that many had hoped for after the tumult of 2020. Right now, the story of 2021 is the changing narrative around momentum and growth stocks. At points last quarter the fervor surrounding these stocks seemed unstoppable, and even produced peculiarities such as the Game Stop saga. In mid-February the NASDAQ Composite (growth and tech-heavy) was outperforming the Dow Jones Average (more value heavy) by nearly 7%. Since then, that trend has reversed with tech and growth stocks falling while value has gained favor. One of the main drivers of growth stocks’ woes has been rising yields, which generally has a negative effect on these riskier stocks. The rise in value stocks can be attributed to the same reason driving yields higher: improved economic outlook. The positive outlook has signaled a broadening of the equity market’s rise, which had been concentrated in the tech sector for the past year. As it broadens, investors are rotating out of an arguably overvalued tech sector and into lagging value equities that are expected to catch up as the economy strengthens.

Equities rose in March on positive economic news regarding lower jobless claims and higher job creation. Consumer sentiment also rose after the disbursement of the most recent stimulus check and planned government spending packages. The spending packages would be aimed at projects, such as infrastructure, to further stimulate the economy, but there is an uphill battle facing these bills’ passages. Regardless, the strengthening of the economy is evident at this point, and investors’ rotation into value stocks is further substantiation.

In Mid-March the Federal Reserve kept interest rates anchored near zero and did not revise their forecast that rates will remain unchanged through at least 2023. They also raised their expectations for GDP growth and inflation while lowering unemployment estimates. The concerns of rising inflation still exist, and the question now is when and where inflation and yields will plateau. If inflation continues to rise past the Fed’s expectations, they may need to consider raising rates prematurely. This could have an adverse effect on economic growth since it would increase borrowing costs.

At present, we are seeing more positive signals than negative. The broadening of the equity market’s rise is encouraging and the technology sector’s lagging behind cyclicals and value is long overdue. The economy’s strength is also a major positive. Valuations are still holding back our investment levels in U.S. equities, and we remain at an opportunistic 78%. Valuations internationally remain relatively more attractive and we are 87% invested in our flagship international strategy.

By the Numbers (Year-to-Date)*

U.S. Equities (S&P 500 Index) | 6.1%

International Equities (MSCI ACWI ex-U.S.) | 3.5%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | -3.4%

Global Bonds (JP Morgan Global Aggregate Bond Index) | -4.5%

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 3/31/2021. Data provided by Bloomberg, NorthCoast Asset Management.

*Source: Bloomberg, WSJ, NorthCoast Asset Management.

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