The Navigator | April 2021
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.
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↓ Valuation | With the rotation out of the tech and growth sectors, the relative valuation of this sector has improved slightly. Overall, however, valuations are generally still very high and equities appear overvalued. P/E ratios increased with the market rise from 30.88 at end of February to 32.43 at end of March.
↔ Sentiment | Sentiment is still below its pre-pandemic levels, but it is at its highest level since the pandemic’s start. The University of Michigan consumer sentiment survey was up to 85 from 77 a month earlier. Stimulus and solid economic data, such as net job gains, are driving the rise.
↑ Technical | Technical indicators remain positive. The broadening of the U.S. equity market’s gains is an encouraging sign of more general momentum throughout the market. At the end of the quarter, the S&P 500 sits comfortable above its main moving averages. Currently is 12% above the 200-day moving average.
↑ Macroeconomic | Strong job numbers and rising sentiment will have hopefully had a knock-on effect of stronger consumer spending, a main driver of economic growth in the U.S. Income growth is expected to be slow for the time being, but net job growth is very encouraging. Proposed spending bills could further boost economic outlook, but their passages will be hard won in a divided Congress.
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As of 3/31/2021. Data provided by Bloomberg, WSJ, NorthCoast Asset Management.
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