The Navigator | June 2020 Equities had another positive month in May, which contributed to the S&P 500 having its Read More
The Navigator | March 2020
Steep losses in the final week of February grabbed headlines and the attention of global investors. The lack of regional containment of the Coronavirus as well as expectations of negative economic and earnings impacts caused a precipitous decline. Investor reaction intensified last month as confirmed cases outside of China increased, specifically in South Korea, Iran and Italy. The global spread of the virus fueled fears that the economic effects will continue for some time. The most impactful of which involve concerns about consumer behavior changes, causing reduced travel and spending. We expect the real impact on earnings to be sector-specific and affected largely by reductions in economic activity in China. However, economic uncertainty did result in a broad selloff in late February, dragging all of the S&P 500’s 11 sectors negative for the year. In total, the index fell almost 13% from its record high on February 19th.
The risk of a Coronavirus pandemic is likely to continue having an effect on the economy and equity markets. The selloff in February was effective in pricing in negative expectations to some degree. It is possible that the spread has begun to plateau and the situation may improve more rapidly than anticipated. With central banks having indicated support for stimulative monetary and fiscal policies, an improvement in containment could lead to favorable economic and equity conditions.
Our models had been showing elevated valuation readings as well as neutral sentiment and macroeconomic indicators prior to the selloff. These readings pushed our cash allocation to roughly 25%, which provided some buffer during the market-wide losses. At this time, it is difficult to predict the immediate-term reaction from equity markets as it appears to be linked to containment of the virus, which is currently uncertain. Without downplaying the loss of human life, our models are currently estimating a contained situation similar to the previous recent episodes of volatility (Brexit, trade wars, and inverted yield curve) that the economy effectively powered through.
↔ Valuation | Valuation indicators strengthened as the market sold off. S&P 500 forward P/E ratio decreased to 17.1 from 18.5. Surprisingly, the correction did not affect higher-multiple equities more severely.
↔ Sentiment | Consumer sentiment in the U.S. remained strong last month. The University of Michigan Consumer Sentiment Survey increased to above 100. Investors and manufacturers are showing signs of worry, but there is too much uncertainty to validate these worries.
↑ Technical | Technical indicators did soften slightly last month. The S&P 500 fell below its moving averages and momentum stalled. However, reversal indicators strengthened due to the pullback. The VIX elevated to roughly 40.
↔ Macroeconomic | There is no quantifiable change in macroeconomic data. Growth forecasts have been revised down, but it will take time for the real figures to digest any impact of the virus.
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As of 2/29/2020. Data provided by Bloomberg, NorthCoast Asset Management.
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