Resources

Rising Yields Cap a Positive Month with Volatility - NorthCoast Asset Management

Written by Julia Zhu | Mar 5, 2021 4:04:02 PM

The Navigator | March 2021

U.S. equities rose in February overall despite the decline during the final week of the month. These gains were a continuation of the new bull market driven by an optimistic outlook on economic recovery along with significant momentum trading. Stocks fell in the final week due to government bond yields rising to their highest levels since before the pandemic. This had an adverse effect on equities because higher yields provide a more attractive alternative to equities. Since yields had stayed low throughout the bull market, investors in search of yield were forced to look to the riskier equity market, further boosting equity prices. With yields moving higher, this trend could slow. Additionally, the improving economic picture and rising yields caused worries of a future rise in inflation. The Federal Reserve would have to raise interest rates more quickly than anticipated, increasing the costs of corporate lending and potentially hampering current economic upswing.

The equities that were hit hardest by the reaction to higher yields were large-cap and technology stocks. Both have been the largest benefactors of momentum trading since this most recent bull market began. But with their valuations stretched, these groups may be the most vulnerable to the relative attractiveness of bonds. If so, value and smaller-cap equities may catch up to large-cap and technology stocks. Both the S&P 500 Value and S&P 500 Equal-Weight indexes outperformed the cap-weighted S&P 500 in February.

Data released during the month indicated that the U.S. economy is indeed recovering. U.S. household income increased significantly in January, though almost all of that increase was a product of fiscal stimulus. Consumer spending did increase as a result, which is an encouraging sign for economic growth. The road to a full recovery is still long, but rising spending is a good sign for the remainder of the year.

Moving into March, we are encouraged by the strengthening macroeconomic indicators and the possibly positive impact of another fiscal stimulus on the economy and markets. The boost in yields substantiates the strengthening economy, but the inflation risk associated with it will be a development to closely monitor. Unmoved by these events, the Federal Reserve has remained unconcerned and committed to their plan of keeping rates low for the long-term. Yields have cooled in recent days, but pressure will mount on the Fed if they begin to climb again. While inflation risk does not appear immediate, it could still affect sentiment and the momentum that has been driving much of the market movement.

NorthCoast Navigator

Valuation | Valuation remained largely unchanged in February, and is still stretched. The hit to large- and mega-cap stocks towards the end of the month could indicate a much needed cooling of this over-priced sector of U.S. equities. P/E ratios remain above 30.

Sentiment | February saw positive flows into the equity market as sentiment indicators improved during the month. University of Michigan Consumer Sentiment remained relatively flat from January to February. Investor sentiment rose after faltering during the rise in bond yields.

Technical | Technical indicators remain positive. There are a few indications that momentum trades, such as the tech sector, are not as unshakeable as previously thought after pulling back at the end of the month. However, trends are still positive and volatility is calming down from last week.

Macroeconomic | Strong consumer spending is a good sign for the overall economy. There is some bitter-sweetness since much of the spending came as a result of fiscal stimulus. Regardless, positive growth is welcome, and economic data points to recovery for the time being.

Important Disclosure Information

As of 2/28/2021. Data provided by Bloomberg, WSJ, NorthCoast Asset Management.

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.

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.