The Navigator | January 2021
There were a number of remarkable market events in 2020, the most well-known of which was the S&P 500’s rally from its record selloff in March. After losing nearly a third of its value in the spring, the S&P 500 rose almost 70% by year end from its March lows, and notched a gain of almost 18% for the year. The S&P was not alone in its record run – the Dow Jones Industrial Average and Nasdaq both had equally remarkable runs. Together, these three major indexes recorded 100 record closes during the year. For context, that is the most record closes since 2017, a banner year for equities with certainly no pandemic to contend with. Such positive market action was not exclusive to equities however, and it is almost easy to forget that some oil futures traded below $0/barrel in April, having since rallied back to around $50/barrel. The driver of such widespread investor optimism was largely faith in governments and central banks to prop up economic activity through accommodative monetary policy (low interest rates) and fiscal stimulus. Both of these actions did come to fruition with central banks committing to as supportive policies as necessary and governments passing major stimulus bills. The most recent stimulus bill in the U.S. was confirmed last month. These actions were critical to maintaining optimism throughout markets.
The end of 2020, particularly December, was somewhat of an inflection point for what had been driving the markets higher. Investors are moving from optimism about governmental intervention to confidence that vaccines will bring more economic recovery and eventually restore a high level of activity. The Chinese economy has substantiated this belief since it has essentially recovered, now functioning at a high level since the country largely controlled the pandemic’s outbreak. Other countries are dependent on the vaccines and their rollouts going smoothly, which does have the inherent risks of a major logistical undertaking.
The country as a whole has been very optimistic about the end of 2020 and the start of a new year. Of course, little has changed since last week but there is the expectation that in this year the country will be able to return to normal activity. To achieve that, the rollout will have to move smoothly. We are certainly wary of potential issues with the vaccine distribution and believe there will be some sustained push-pull between rising cases and vaccine distribution in the coming months. Similarly, we expect some back and forth between politics, stimulus and economic activity. We are also aware that much of the optimism surrounding equities is warranted, but that exuberance can significantly inflate prices to unsustainable levels. Currently, some investors are seeking a very high level of risk that we do not see as sustainable. The Georgia senate race runoff will have some market implications in the short-term as it determines control of the senate. A democratic victory might cause some investors to worry about tax increases, though chances of hikes seem slim for the time being. We currently sit 73% invested in our U.S. tactical flagship strategy and 82% invested in tactical international strategy.
NorthCoast Navigator
↓ Valuation | With such a strong year for equities, it is easy to ignore that the economy is still recovering from last Spring’s dip in productivity. The gap between equity prices and company earnings is severe. Valuations are still strongly negative in the U.S.
↔ Sentiment | Sentiment improved in December with the passage of another stimulus bill as both investors and consumers appear more optimistic about current and future economic conditions. The University of Michigan consumer sentiment survey jumped higher from November to December, but is still well below Dec 2019.
↑ Technical | Market momentum is currently very positive thanks to so much upward price movement. For the same reason, reversal indicators are slightly red. Still, technical indicators are overwhelmingly positive and the S&P 500 sits significantly above its most common moving averages.
↑ Macroeconomic | Economic figures showed some signs of strength as the year drew to a close. Manufacturing was a bright spot as compared to services, which were hurt by recent lockdown restrictions. The resilience of manufacturing amid increasing lockdowns is a very positive sign moving into 2021.
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As of 12/31/2020. Data provided by Bloomberg, RBC, NorthCoast Asset Management.
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