A Negative Month, Opportunistic Outlook

The GameStop saga has been inescapable over the last week. While it will likely fizzle out soon enough, it is having an effect on the general market. US equities were down in the final week of January -- some of that due to the uncertainty surrounding what’s been happening with GameStop and other retail investor stock buoys. Institutional investors such as hedge funds who had shorted these stocks have been forced to sell some positions in order to raise cash to cover those shorts. These institutions tend to drive very large volumes in and out of the market, and sales of that size have caused some negative price movement in certain large-cap names. Investors on the outside looking in are concerned about the unexpected volatility and the lack of confidence it causes in the market.

Equities were negative to end January for other reasons. The vaccine rollout in the U.S. has been hitting some logistical snags and supply issues that could impact the speed at which the population is inoculated and the economy recovers. Additionally, many countries including the U.S. are now dealing with outbreaks of newly identified variants of Covid-19. There is some uncertainty about the effectiveness of current vaccines on these new strains. Initial data shows that while the vaccines may be slightly less effective, they should still provide protections especially from severe symptoms. Two additional vaccines from Novavax and Johnson & Johnson finished their late-stage trials in January, and were found to be 89% and 66% effective respectively. Despite J&J’s vaccine being less effective than others at preventing the disease entirely, it did reduce the most severe symptoms.

The U.S. released Q4 2020 economic data in January. Preliminary readings for GDP show growth at an annualized rate of 4.0% during the quarter. Consumer spending slowed relative to Q3, but was still a positive 2.5% annual growth rate. In all, the economy contracted last year and is roughly 3.5% smaller than the year prior, as measured by GDP. That being said, the last two quarters of 2020 were positive for economic growth, and economists are anticipating that the recovery will continue into this year. The main factor this year remains the same as last: how well the pandemic is controlled and how quickly the economy can fully reopen.

The unexpected market movements have garnered much of the media’s attention, but our focus is more on the economic and earnings data from Q4. If there is any takeaway from the GameStop saga, it is that some areas of the market are overvalued, driven by sentiment. We have been watching valuations as our indicators have been negative and showing some over-exuberance. Coronavirus statistics are also starting to ameliorate concerns in many areas of the country, and discussions of another stimulus bill are resuming in DC. We are 72% invested in U.S. and 83% internationally.

By the Numbers (Year-to-Date)*

U.S. Equities (S&P 500 Index) | -1.0%

International Equities (MSCI ACWI ex-U.S.) | 0.2%

U.S. Bonds (Barclays U.S. Aggregate Bond Index) | -0.7%

Global Bonds (JP Morgan Global Aggregate Bond Index) | -0.9%

The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. equity 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.

As of 1/31/2021. Data provided by Bloomberg, NorthCoast Asset Management.

*Source: Bloomberg, WSJ, NorthCoast Asset Management.

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