You are receiving this communication because you are a client of or have expressed interest in NorthCoast Asset Management
April 2024
Current Equity Exposure
Stocks continued to advance in March, with the S&P 500 and the Dow climbing by 3.2% and 2.2%, respectively, while the technology-heavy Nasdaq lagged by rising 1.9% for the month. March marked the fifth consecutive month of positive performance for U.S. stocks since October 2023. The recent surge in equity performance was primarily driven by multiple expansions, as forward earnings over the past 12 months increased by only 7% globally, contrasting sharply with the nearly 30% rise in the P/E ratio. Investor confidence remains high, and market positioning is lifted, supported by the expectations of a “Goldilocks” outcome with a soft landing. Furthermore, markets reacted to the March Fed meeting with a sense of relief as the committee did not signal a more hawkish tone in light of the recent higher-than-expected inflation data. However, we perceive downside risks for the equity market due to over-valuation, a potential correction for overly-crowded momentum investments, upside inflation risks, and uncertainties surrounding geopolitical and political developments. With this backdrop, we maintained our conservative allocation to U.S. equities at 57%. We increased our international equity exposure from 59% to 73% during the month, given the more robust macro and sentiment signals in our international cash scaling model compared with last month.
The Factors
Valuation
Valuation metrics for equity remained negative. P/E increased from 24.4 at the end of February to 25.2 at the end of March.
Forward P/E increased to 21.8 at the end of March from 21.1 at the end of February.
Inflation-adjusted valuation metrics continued to be negative.
Equity valuation metrics relative to bonds remained negative with high bond yields.
Sentiment
U.S. manufacturing activity contracted for the 16th consecutive month, with the ISM manufacturing index falling from 49.1 to 47.8.
The University of Michigan Consumer Confidence Index unexpectedly rose to 79.4 in March, the highest level since July 2021, as consumers were more optimistic about inflation outlook.
The NAHB index continued to increase to 51, above the neutral level. .
Technical
Technical indicators were positive overall, with positive momentum and fear signals outweighing negative reversal signals.
The S&P 500 was 14% above its 200-day moving average, 9% above the 100-day average, and 4% above the 50-day average.
The VIX index climbed in the first half of the month to 15.2 but decreased later in the month as realized volatility dropped. It settled at 13.0 at the end of the month.
Macroeconomic
Nonfarm payrolls rose by 275,000 in February, with significant negative revisions for January and December. The four-week moving average of initial jobless claims was slightly lower to 211,000 as of March 23.
Retail sales rose 0.6% in February, with sales in January and December revised down.
U.S. industrial production rose 0.1% in February.
What's Driving the Markets?
Fed policy:As widely expected, in its March meeting, the Federal Open Market Committee (FOMC) kept the federal funds rate target unchanged at 5.25% to 5.5%. Despite higher-than-expected inflation data in January and February, the committee’s latest Summary of Economic Projections suggests 75 basis points rate cuts in 2024, with the first rate cut expected in June. Also, the committee seems more confident about the possibility of a soft landing, with its GDP forecast for 2024 revised upward from 1.4% to 2.1%. At the same time, Chairman Power reiterated the need for greater confidence in the sustainable inflation trend before reducing the target range. Market reaction to the March meeting was modestly positive, with a sense of relief that the committee did not signal a more hawkish tone in light of the recent inflation data. The three primary U.S. stock indexes gained about 1% on the close on March 20.
Inflation: February's Consumer Price Index (CPI) came in slightly warmer than expected for the month, with headline and core CPI (excluding food and energy) each up 0.4% from January to February. On a year-over-year basis, the CPI and core CPI rose by 3.2% and 3.8%, respectively. However, the report's details were a bit encouraging. CPI for shelter decelerated modestly (up 0.4% after a gain of 0.6% in January), and core services prices slightly cooled (up 0.5% after an increase of 0.7% in January). We maintain our view that shelter prices will ease in 2024, which is a primary factor supporting our view that inflation will moderate gradually in 2024. At the same time, our concerns persist regarding the tight labor market's impact on inflation, with wage inflation significantly higher than levels consistent with the inflation target.
Bank of Japan monetary policy:During its monetary policy meeting on March 18-19, the Bank of Japan abandoned negative rates as part of its large-scale easing monetary policy, which previously consisted of negative interest rate policy (NIRP), yield curve control (YCC), and ETF purchases. At the same time, the Bank of Japan emphasized its commitment to maintaining a dovish policy stance to keep accommodative financial conditions. In assessing the current economic landscape, the BoJ noted that "Japan's economy has recovered moderately, although some weakness has been seen in part" (mainly referring to the declines in consumption and production.) The policy changes, including an end to NIRP, largely matched the markets' expectations and, thus, did not result in significant market volatility. We expect the next rate hike will have more impact, though it's stated that the timing and pace of such hikes would depend on the economy.
As of 3/31/24. Data provided by Bloomberg, NorthCoast Asset Management, Federal Reserve History.
1 The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. and international equity exposure and 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.
NorthCoast Asset Management is a d/b/a of, and investment advisory services are offered through, Connectus Wealth, LLC, an investment adviser registered with the United States Securities and Exchange Commission (SEC). Registration with the SEC or any state securities authority does not imply a certain level of skill or training. More information about Connectus can be found at www.connectuswealth.com.
NorthCoast and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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.
INVESTING ENTAILS RISKS, INCLUDING POSSIBLE LOSS OF SOME OR ALL OF THE INVESTOR'S PRINCIPAL.
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.
NorthCoast Asset Management
One Greenwich Office Park, Greenwich, CT 06831, United States
