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2019 Q3 - President's Post

October 15, 2019

President & CEO Dan Kraninger reflects on the 3rd quarter of 2019 and provides insight moving forward.

 

“People only see what they are prepared to see.”   - Ralph Waldo Emerson

 

Count the number of F’s in the following sentence…  

FINISHED FILES ARE THE RESULT OF YEARS OF SCIENTIFIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS.

NorthCoast maintains opportunistic posture moving into 4th quarter

October 1, 2019

What happened in September?

After the volatility in August, U.S. equity markets rebounded to push the S&P 500 index positive for the 3rd quarter. The index now sits just over 1% below its record high set in July. During the month, investors appeared to rotate away from the more expensive momentum equities towards undervalued stocks. The tech-heavy Nasdaq finished the month with its first quarterly decline in 2019. Despite the general market rise during September, some cautious domestic economic data was released. Consumer spending grew at a modest 0.1% during August, below the average 0.5% a month during the first 7 months of the year. Slowed consumer spending still raises concerns that the economic slowing abroad coupled with continued trade conflict may be affecting the U.S. The Federal Reserve will also announce their rate decision at the end of October. By then, some new economic data will have been released and their decision will likely be clearer. For now, expectations are that the central bank will cut rates. International equities rebounded more strongly than the U.S. in September, but the general ACWI-ex U.S. Index was negative for the 3rd quarter. While economic and sentiment concerns loom larger abroad than in the U.S., equity prices are much more accommodating and technical indicators are solid.
 

 

Stocks move lower in August as trade war implications ramp up

September 1, 2019

 What happened in August?

Volatility returned to the U.S. equity market in August. After two positive and generally calm summer months, a series of headline-worthy events caused a few abrupt downturns that, despite recouping some losses towards the end of the month, dragged the S&P 500 down -1.7% for the month. First, investors reacted to the inversion of the 3-month and 10-year Treasury notes. While this signal is ominous and sparked some recession fears, it provides no certainty that one is imminent. U.S. economic data remains fairly strong and some extraneous factors such as extremely low international yields and a general flight to safe assets may be deepening the yield curve’s inversion. The U.S. and China publicly exchanged rhetoric to intensify the trade conflict which raised fears that continued tariffs will affect both economies and the global economy. However, discussions are set to continue in September and both parties appear to be leveraging the media to increase pressure on one another at the expense of global markets. Everything surrounding this trade deal is still in question and its impact has mainly been seen in lower consumer confidence in the U.S. Economic output is still growing and the second quarter GDP growth rate released in August was 2.0%. While this rate is lower than the first quarter, it still shows solid positive growth driven by corporate profits and consumer spending.
 

 

A calm July was capped with the Federal Reserve lowering rates for the first time since 2008

August 1, 2019

What happened in July?

U.S. Equities had a relatively calm July with generally positive quarterly earnings reports and a down tick in concerning headline news. The biggest event to come out of July happened on the month’s final day when the U.S. Federal Reserve cut rates for the first time since 2008. This decision was largely expected and had been telegraphed by the Fed for some time, but investors were somewhat disappointed by the Fed’s explanation. As opposed to justifying the cut as a way of getting ahead of potential economic weakness, Fed chairman Jerome Powell explained it as a mid-cycle adjustment and that more cuts would require more concrete economic weakness. This statement has created a heightened sense of uncertainty about what the Fed will do next.
 
The majority of S&P 500 companies that have reported Q2 earnings exceeded expectations and so far an interesting trend has appeared. Companies in the S&P 500 with larger global revenue exposure underperformed those with less global revenue exposure during Q2 due to a strong dollar and global economic questions.
 
The U.K. elected a new Prime Minister, Boris Johnson, as Brexit negotiations have been stalled for some time. A new Prime Minister means a possible shift in tactics to get the Brexit deal solidified or that the U.K. will exit the EU without a deal in place. The underperformance of U.K. equities relative to the rest of the EU worsened in the second quarter.
 

 

U.S. stocks close out the best half of a year in 22 years as equities rally in June

July 1, 2019

What happened in June?

The U.S. equity market experienced a sharp reversal from the downturn that occurred in May. Stocks rose 7.0% during the month on their way to notching the best first half of a year in 22 years for the S&P 500. Positive market action in the second quarter was driven largely by the Federal Reserve signaling the possibility of cutting rates in the event of tariffs negatively impacting the economy. This news boosted confidence that any blow of continued tensions between the U.S. and China would be softened.
 
The Group of 20 (G-20) meeting occurred the last weekend of June where President Trump and President Xi met face-to-face for the first time since rhetoric intensified in May. Initial reports appeared positive and further details from this round of trade talks will likely influence market action and volatility.
 
Around the globe, emerging markets bounced back after a dismal May and European stocks also experienced their best first half of a year in two decades. These markets’ actions were driven by similar factors as the S&P 500 and are likely to be influenced by trade discussions in the coming weeks.
 

 

A setback in trade negotiations between the U.S. and China set of a sharp selloff in May.

June 1, 2019

What happened in May?

U.S. stocks tumbled in May as trade negotiations between the U.S. and China publicly deteriorated, and tensions between the two largest economies in the world heated up once again. This news was a sharp reversal from positive news in April that had spurred confidence that a deal would be imminent. In addition, talk of U.S. tariffs on Mexico was reintroduced towards the end of May. As a result, investors flocked to the safe haven of government bonds driving prices up and yields down. The yield on the 10-year U.S. Treasury note had its largest monthly decline since September 2015 and sank below the 3-month T-Bill, causing what is called an inverted yield curve. This phenomenon is generally regarded as a signal of expected economic contraction. However, preliminary readings of underlying inflation growth in May ticked higher to 2%. This contradiction may be a sign the yield curve inversion is being caused by uncommon circumstances.
 
Global trade concerns hit international markets negatively as well, in particular emerging markets. With investors losing their appetites for risk, assets flowed out of the generally riskier regions and the MSCI Emerging Markets Index fell 7.3%.
 

 

Positive U.S. economic data takes domestic equities to new all-time highs in April

May 1, 2019

What happened in April?

U.S. stocks hit fresh highs in April for the first time since September 2018. The record highs were brought on in part by positive U.S. economic data, renewed trade optimism and generally positive Q1 earnings reports. Economic data released in April showed that the U.S. economy grew at an annualized rate of 3.2%, higher than economists’ forecasts. This growth rate is the strongest for a first quarter in four years and occurred despite a decrease in consumer spending. Increased exports and inventory investments buoyed this decline. The U.S. and China have also set a tentative timeline for a trade agreement that is reported to lead to a signing ceremony in either late May or early June. Q1 earnings reports continue to roll in and have been generally positive. Google’s parent company Alphabet did report a slowdown in advertising revenue towards the end of April, but the technology sector was still a leader of S&P 500 sectors, second only to financials last month.
 
Some positive news out of the Eurozone in April - GDP growth rate hitting 1.5% during the first quarter. While still below the U.S., this rate was higher than expected and significantly stronger than Q4 2018’s 0.9%. Emerging markets, as measured by the MSCI Emerging Markets Index, had another positive month, up 2.1%. However, a strong U.S. economy has resulted in a strengthening dollar that could derail this region’s equity market success this year.

 

U.S. stocks closed out Q1 2019 with a positive March and notched the largest quarterly gains since 1998

April 1, 2019

What happened in March?

U.S. stocks closed out Q1 2019 with a positive March and notched the largest quarterly gains since 1998. The uptick was driven in part by growing consensus that the U.S. Federal Reserve will hold interest rates low due to concerns of slowing global economic growth and by some renewed optimism about U.S. – China trade talks. Valuations were also more attractive after the volatile market decline pared back stock prices in the final months of 2018. Domestic equities have recouped almost all of last year’s 4th quarter losses and prices have returned to more elevated levels. 
 
Both U.S. and global bond prices increased in the month of March, which appears to have been driven by some investors’ movements to safer assets due to global economic growth concerns and the general lack of inflation.  Uncertainty across the globe has continued, especially regarding Brexit negotiations, which garnered a lot of attention last month because of the inability of the U.K parliament to pass a Brexit agreement.

 

The strong start to 2019 continued in February on upbeat earnings and U.S. economic news

March 1, 2019

What happened in February?

The strong start to the year continued in February with a positive month for equities. Relatively upbeat earnings and economic news outweighed continued uncertainty and concerns about slowing global growth.

One of the top stories from the month was the U.S. extending the deadline for increasing tariffs on Chinese goods, possibly signaling that an agreement is near. However, the month came to an end with no firm indication of a conclusion to the negotiations. Additionally, concerns remain that any agreement will not bring an end to the rivalry between the two countries. As negotiations continue, the Chinese manufacturing purchasing manager index dropped to its lowest level in three years – reinforcing some concerns of a global slowdown.

While global growth might be slowing, the U.S. economy appears to be strong. Positive economic data was released last month including the GDP growth rate from Q4 2018 beating estimates, personal income growth and a rebound in business investment. Doubts remain however over the sustainability of the decade-long expansion. The Federal Reserve’s current “patient” stance hints at these concerns.

Internationally, emerging markets had only a slightly positive month after a large rebound in January. The U.K. is still struggling to reach a Brexit agreement and Canadian Prime Minister Justin Trudeau is facing domestic political controversy.

Global equities rebound from a tumultuous end to 2018 with a positive start to 2019.

February 1, 2019

What happened in January?

After a tumultuous end to 2018 devoid of any Santa Claus rally, 2019 began with a positive month for global equities. Increasing worries over a global economic slowdown were offset by generally positive Q4 corporate earnings and Fed policy announcements. Markets responded positively to the Federal Reserve’s less aggressive view towards hiking interest rates, providing a bigger appetite for riskier assets like equities.

Despite the positive month, market volatility has carried over from 2018 as January was not lacking in headlines that perpetuated the uncertainty plaguing last year’s markets. Little tangible progress has been made in the U.S. and China negotiations and unimpressive economic data from second largest economy may imply some increasing pressure to reach a conclusion to the trade dispute. The longest partial government shutdown in the U.S. occurred in January and concluded with only a temporary budget extension. The shutdown could produce slightly skewed economic data in the coming months. The Eurozone was not immune to poor economic data but the region did post gains last month. A Brexit agreement was rejected in the U.K. parliament, which only added to the uncertainty of a conclusion. Emerging markets rallied from a tough 2018 with a positive January. The MSCI Emerging Markets Index was +8.8%.

A volatile month containing large downswings and the largest single-day point gain ends with equities in negative territory

January 2, 2019

What happened in December?

Stocks traded in a series of volatile sessions throughout the holiday season and finished the month in negative territory. Investors continued to weigh the possible impacts of slowing global growth, geopolitical trade disputes and the partial U.S. government shutdown.
 
Major U.S. indices such as the S&P 500 and Dow Jones Industrial Average suffered their worst Decembers since 2008. The technology-heavy NASDAQ composite fell into bear market territory on 12/21 declining over -20% off its high in late August. The previously high-flying tech sector has taken the brunt of this market downturn as investors shed the risk associated with this expensive sector.
 
The Federal Reserve raised the target interest rate by 0.25% at their December meeting. Though the move was expected, the increase continues to push interest rates higher, which typically lead to higher consumer and business lending rates, escalating concerns of slowing future economic growth. Though not enough to erase the monthly and yearly losses, stocks moved higher in the final week of the year. Along with possible progress in China-U.S. trade talks, investors took advantage of the recent volatility by picking up discounted stocks hit hard by the pullback.

Upbeat trade news buoys sliding equities in volatile November

December 1, 2018

What happened in November?

The month began with a continuation of the upturn that started in the final trading days of October but the positive run was short-lived. After reaching a peak intraday on November 8, the S&P 500 dropped just over 6% in the following few weeks. The selloff could be largely attributed to unexpectedly poor guidance from leading tech companies, a slump in oil prices and continued worries over U.S. – China trade disputes.
 
The third quarter’s earnings season brought about some fears that corporate earnings may have peaked as the effects of the corporate tax cut faded and general concerns over the economy were raised. A glut in oil supply drove prices of the commodity significantly lower, which added to concerns about global economic health and overall market uncertainty. The Federal Reserve was also in focus throughout November as investors searched for information over whether ambiguity during October and November had impacted their policy path. Despite intra-month declines, general market indices did steady and finished the month positive thanks to some more upbeat news concerning U.S. – China trade and investors preparing for the final month of 2018.
 
The trade dispute has impacted Asian markets significantly and with a lack of positive indications, November was no exception. European markets fell in line with the global volatility and had the added uncertainty of Brexit concerns that roiled the British pound in November.

Thanks to a rally in the last two days of October, equities (S&P 500 Index) avoided their worst month in a decade.

November 5, 2018

What happened in October?

Thanks to a rally in the last two days of October, equities (S&P 500 Index) avoided their worst month in a decade when equities fell over -16%. The almost +3% move over Tuesday (Oct 30) and Wednesday (Oct 31) buoyed stocks for a temporary relief but they still finished the month down almost -7%, the index’s worst month in 7 years.
 
Before October, the S&P 500 finished positive in 27 of the last 31 months dating back to March 2016, resulting in a +56% return. It seemed a healthy pullback or correction (decline of 10% or more from peak to trough) was in order. NorthCoast President & CEO, Dan Kraninger, wrote about it in his recent quarterly message to clients at the beginning of the month.
 
Rising interest rates, a stronger dollar, and continued escalation of trade conflicts with China could have all attributed to falling stock prices as investors reevaluated their outlook on future growth. Along with the stock market’s decline was an unusual concurrent drop in bond prices, putting most diversified portfolios in a difficult position. Yet bullish investors (including NorthCoast) did their best to take advantage of the dips. Big one-day advances followed sharp declines provided optimism in an over-corrected market. The S&P 500 Index finished up or down by more than 1% in 10 of the last 15 sessions (5 positive and 5 negative).
 
Slower revenue growth and continued privacy issues derailed some of the largest technology companies, as the sector was one of the hardest hit in the October decline. Across the globe, international equities continued to decline with the MSCI All-Country World Index ex-U.S. (ACWI ex-U.S.) falling -8.1% for the month amid slowing economic growth.

Despite only a modest rise in September, the S&P 500 had its best quarterly return since 2013.

October 5, 2018

What happened in September?

Despite only a modest rise in September, the S&P 500 had its best quarterly return since 2013 and, with lagging international and emerging market returns, extended U.S. equities’ lead over the rest of the world year-to-date.
 
Economic data out of the Eurozone showed stalling growth while investors remain optimistic about the strength of U.S. assets. This faith in the U.S. economy outshone tensions with China and has been bolstered by some positive signs of Canada rejoining NAFTA negotiations.
 
The dollar has weakened slightly from earlier in Q3, but rose after the Federal Reserve announced the third rate increase of 2018. The strong dollar is still negatively impacting emerging markets as most of these countries have dollar-denominated debt that becomes more expensive with a stronger dollar. The Fed’s rate increase in September was expected and a fourth increase of the year is forecasted for December. Analysis of the Fed's statement regarding increasing rates raised expectations of more rate increases in 2019.
 
The U.S. technology sector stumbled in September as the Nasdaq Composite fell 0.8%, its largest monthly decline since Facebook’s data scandal in March. This sector’s valuations remain stretched and have strongly contributed to the market’s overall elevated multiples. These levels will be closely watched especially if the divergence from international stocks becomes more pronounced

Strong domestic economic data and a good month for tech stocks boost U.S. equities as internationals lag

September 7, 2018

What happened in August?

A strong month for tech stocks and more positive economic data bolstered U.S. equities in August despite continued trade uneasiness. The U.S. and Mexico appeared to have reached a trade agreement that will await approval by both governments. In the meantime, U.S. and Canadian officials have been working feverishly to incorporate Canada into the agreement. On the other front of global trade negotiations, the U.S. appears set to move forward with tariffs on $200 billion of Chinese imports in early September.
 
Amidst the trade uncertainty, the U.S. economy is still rolling with strong data released in August regarding the 2nd quarter. Corporate profits were 16.1% higher than the same period last year and GDP was revised up to a 4.2% annualized growth rate. The S&P 500, Nasdaq Composite and Russell 2000 all touched new highs.
 
Emerging markets have been hit severely by the situation in Turkey where the Turkish lira lost 25% of its value relative to the U.S. dollar in August. Investors worried about currency devaluation in other emerging markets pulled large investments out of these areas and drove the asset class generally lower. Compared to the U.S., less solid economic data abroad left international markets impacted by trade unease in August.

Despite unsettling news in the tech sector, U.S. equities rose in July on a more optimistic trade outlook, generally positive earnings data and economic growth

August 2, 2018

What happened in July?

Despite unsettling news in the tech sector, U.S. equities rose in July on a more optimistic trade outlook, generally positive earnings data and economic growth. The 2nd quarter earnings season kicked off with notably negative news from Facebook and Netflix as both tech giants struggled to keep up new user acquisition. Facebook’s report showed the impacts of the data scandal earlier this year with lagging daily user data and unexpectedly negative guidance for the remainder of the year. The NYSE FANG+ index which is comprised of popular tech companies like Facebook, Amazon and Netflix slid into correction territory for the second time this year. Overall, earnings season has proved largely positive so far with just over 83% of companies in the S&P 500 having reported and 73% of those reporting above expectations.

International economic figures released during the month lagged behind the U.S., which posted a 4.1% GDP growth rate during the second quarter, its largest quarterly increase since 2014. The Eurozone economy grew at a rate of 1.4% during the same period, the slowest in 3 years, and Mexico’s economy contracted. The Chinese manufacturing purchasing manager index slid to a 5-month low in July, possibly as a result of the impacts of U.S. tariffs and trade disputes.

Trade wars escalate, the Fed raises rates and the World Cup kicks off

July 5, 2018

What happened in June?

After a strong start to the month, equities fell in the latter half but hung on to finish June in positive territory. Solid U.S. economic data, including a healthy jobs report, GDP growth projections, strong consumer spending, and easing geopolitical tensions allowed U.S. equities to rally +3.0% between June 1-12. However, the tide quickly turned as U.S. tariffs on steel and aluminum resulted in retaliatory tariffs from the Eurozone and China. It was announced that Harley-Davidson, the U.S.-based motorcycle manufacturer, will be shifting production overseas to avoid the E.U tariff placed on its product. The combined macroeconomic and sentiment concerns pulled U.S. stocks -3.0% from June 13-27 before rallying over the last two sessions to finish the month in positive territory.

Across the globe, international stocks closed negatively for the month and are now -10.1% from their 2018 high on January 26. Among the issues, decreasing industrial output in the Eurozone could slow economic growth in the region while financial markets in China struggle due to increasing trade tensions along with the continued attempt to deleverage.

U.S. equities moved higher in May as positive fundamental data prevailed over headline news.

June 3, 2018

What happened in May?

U.S. equities moved higher in May as positive fundamental data prevailed over headline news. Macroeconomic data continued to paint a rosy picture of the U.S. economy with consumer spending ticking higher in April driven by rising incomes and higher employment. The final tally from first quarter earnings was positive for companies in the S&P 500. In contrast, numbers released by the Commerce Department showed that corporate profits grew by a small amount in the first quarter from a year ago and, without the added benefit from the tax overhaul, profit growth would have been lower.

Geopolitical events were in focus throughout the month. The markets reacted rather severely to news of a new Italian government that may center on skepticism towards the Eurozone. Investors were worried about the state of Italian debt if the country decides to move back to the devalued lira and out of the Eurozone’s economic protection. These political concerns and U.S. trade tariffs impacted the EU market negatively in May. Emerging markets continued to struggle as the U.S. dollar strengthened, making their dollar denominated debt more expensive and pulling investors away from the riskier asset class. At the end of the month, the U.S. decided it would implement tariffs on steel and aluminum products from Canada, Mexico and the EU. This move raised concerns over potential retaliatory trade policies from these countries as well as the impact of higher priced goods on manufacturers and multinational corporations.

U.S. equities have a muted response to a very strong earnings season as investors worry about other market drivers

May 3, 2018

What happened in April?

Bolstered by strong corporate earnings reported for the first quarter, the S&P 500 Index experienced a small gain during the month of April. Of the 274 companies in the general market index that reported their first quarter earnings, almost 80% reported above analysts’ expectations. This number is above the long-term average of 64% and the four prior quarters’ average of 72%. Considering these strong numbers, the equity market’s reaction was relatively muted. The limited reaction may have been due to the equity market boost that already occurred in December from the tax overhaul, which somewhat priced in expected strong earnings for Q1. Trade restrictions and rising oil costs are putting pressure on manufacturers who are subsequently pushing some costs to consumers. As a result, inflation ticked higher in March, increasing by 2% from a year earlier according to the Commerce Department’s price index. A 2% rate of inflation is the Federal Reserve’s target and may put more pressure on the central bank to increase interest rates more quickly.

Across the globe, the pan-European index Stoxx Europe 600 gained in April on positive corporate earnings, despite some unfavorable economic news out of Germany and Italy. In the final hours before the deadline, the U.S. extended the implementation of tariffs going into effect on the Eurozone and other U.S. allies to June 1st, much to the relief of these countries.

Despite strong fundamental and macroeconomic data, market concerns push the S&P 500 to quarterly losses

April 6, 2018

What happened in March?

Equities advanced in early March but concerns over rising interest rates, global trade tensions, and a selloff in the technology sector stunted the rally and turned major stock indexes negative for the month. The S&P 500 Index posted a quarterly loss for the first time since Q3 2015. The Federal Reserve increasing their target interest rate in late March was largely priced into the market, however continually positive economic data had investors betting on a more aggressive schedule of rate increases in the coming years. U.S. tariffs and trade policies rattled the market with speculation of shrinking profit margins for multinational companies and material producers that rely on aluminum and steel imports. However, subsequent negotiations did help to quell some concerns. Growing controversy regarding Facebook’s handling of user data raised questions over possible increased regulation in the technology sector. As a result, the high-flying sector, which accounted for almost 25% of the S&P 500’s market value, drove the overall market lower.

Across the globe, European stocks rallied in the final week of the month to get back to relatively flat and Asian markets saw less of an impact from U.S. technology stocks’ decline, although trade tensions with the U.S. weighed on the Pacific region.

Market volatility returns in February with a large market decline followed by rally

March 1, 2018

What happened in February?

February began with an abrupt reintroduction to stock market volatility. A selloff that started on January 26th extended to February and shaved 10% off of the S&P 500. This is the first time the general market index was pushed into correction territory since late 2015. The reasons behind the selloff are numerous but are largely based off a realization of and reaction to the increased likelihood of a spike in inflation and subsequently increasing interest rates and bond yields. One concern for equity investors is that rising bond yields will attract more investors to bonds, which will lower demand for stocks and pull prices lower. However, a strong Q4 earnings season and continually strong macroeconomic data drove the market higher from the bottom on February 9th. During this positive run of 5%+, the S&P 500 recorded its best week (2/12 – 2/16) since 2013. The new Federal Reserve Chairman, Jerome Powell, gave testimony to Congress affirming the strong state of the U.S. economy, accrediting speculation over rising interest rates and driving the general market down slightly at the end of the month. U.S. bond prices were pushed down by the 10-year Treasury yield climbing to 2.86% at the end of February from 2.73% at the start the month (bond prices decline as yields increase).

Across the globe, international stocks moved in sync with the U.S. stock market’s fall and subsequent rebound during the month. However, international markets ended the month lower than the U.S. due to similar inflation concerns, a lack of progress from Brexit discussions and Chinese factory activity slipping to a 19-month low.

An extremely hot start to the month was met with turbulence as January came to a close

February 1, 2018

 

 

 

 

 

 

What happened in January?

U.S. equities got off to a strong start in 2018 as the three major domestic indexes hit new highs in January before drawing back at the end of the month. Despite the strong numbers, rising bond yields (the 10-year Treasury note hit its highest yield since April 2014) and large intraday declines in the final days of the month raised concerns over the sustainability of such a high-priced market. Volatility in the U.S. also picked up in January with the VIX hitting a five-month high. With over half of the companies in the S&P 500 having reported, 81% beat analysts’ estimates helping to push the S&P 500 to monthly gains on the final trading day of the month.

Across the globe, French GDP rebounded significantly last year growing at its fastest rate since 2011 and boosting Eurozone GDP growth. Often an economic laggard, France’s reemergence is a positive macroeconomic indicator for the Eurozone. Emerging markets continued their positive run into 2018, boosted by a weak dollar, globally low bond yields and increasing flows of investments from around the globe.

2017 Q4 - President's Post

January 22, 2018

President & CEO Dan Kraninger reflects on 2017 and provides insight moving forward

 

 

 

The greatest trick the devil ever pulled was convincing the world he didn’t exist.”  

  - The Usual Suspects (1995)

 

My wife and I like the movies.  We go throughout the year but between Christmas and New Year’s, we really pick up steam.  With the cold weather, time off work, and family gatherings, we certainly didn’t disappoint this year. One in particular stood out and I’m glad we saw it again -- The Usual Suspects.  Interestingly, the line above hit me as soon as I heard it as the lead in to this quarter’s letter.  I’ll simply change a few words --  the greatest trick the market ever pulled was convincing the world volatility didn’t exist.

Consider volatility.  Despite the geopolitical maelstrom in 2017, the North Korean conflict, fear of China’s economic slowdown, the stock market’s advance, and instability in South America, the stock price daily volatility of the S&P 500 Index was the lowest in a half-century. You have to go back to 1964 to find the average daily change for the market as low as it was in 2017.

Year-end wrap on ETF managed portfolios

January 4, 2018

What has been the most notable performer in 2017 in your Tactical Income portfolio, and to what do you attribute its gains?

CLY, the iShares 10+ Year Credit Bond ETF, was certainly among the top performing positions in our Tactical Income portfolio this year. The security was up 12.1% and we currently hold about a 15% position in our portfolio. With the U.S. economy remaining fundamentally strong, the default rate of corporate bonds is relatively low. Our ETF scoring model showed an attractive aggregate for CLY throughout the year with valuations and sentiment signals being the strongest contributors. Exposure to global infrastructure from IGF (iShares Global Infrastructure ETF) was another noteworthy holding in 2017. As investors anticipated pro-growth policies and more infrastructure spending in the U.S., IGF climbed throughout 2017, finishing the year +19%.

What drove the additional allocation to U.S. equities in the growth portfolios and how do you like the asset class heading into 2018?

Global equities end year on a high note as optimism abounds moving into 2018

January 3, 2018

What happened in December?

 | U.S. equities continued their march upward amidst stellar holiday retail numbers that hit their highest levels since 2011, a welcome end to a tumultuous year of store closings and major bankruptcies in the retail sector. Although consumer confidence fell slightly, it was offset by investor sentiment which hit its most optimistic level in three years. After a period of increasing employment yet stagnant wage growth, workers have begun to see increased compensation. Additionally 18 states voted to increase minimum wage, which should aid pay growth moving forward. In a relatively telegraphed move, the Federal Reserve raised its target short-term interest rate. Janet Yellen, in what was likely her final address as the Fed Chair, commented on the global economic growth optimistically and noted that her likely successor, Jerome Powell, holds similar views on monetary policy.

Across the globe, Emerging and Asian markets finished with a positive December and as the year’s biggest winners. European stocks notched their best year since 2013 on surging tech and mining sectors.

Positive economic data across the globe drives markets higher moving to the end of the year

December 5, 2017

What happened in November?

Global equities continued to move higher as major market indices reached new milestones again in November, specifically the Dow Jones Industrial Average (DJIA) which moved above 24,000 for the first time ever. Coming 30 trading sessions after its last, this marks the 5th thousand-point milestone this year. The S&P 500 also hit a new high this year, passing 2,600 and moving up 3.0% for the month. Helping the cause, the U.S. GDP growth rate was revised up for the third quarter to 3.3% and the International Monetary Fund raised its global growth forecasts to 3.6% for this year and 3.7% next year.

Proposed U.S. tax reform legislation, a big driver of recent market advances, hit a snag over concerns about the impact of a significantly lower corporate tax rate on federal deficit. This complication will delay the next senate vote and likely extend the previously aggressive timeline of passage. In monetary policy news, Janet Yellen provided a mostly positive assessment of the U.S. economy in her congressional testimony and confirmed the Fed’s continued plan of gradual rate increases. Across the globe, a strong month (and a stronger year) for tech stocks that pushed the sector of the MSCI Emerging Markets Index above the financial sector for the first time since 2004 ended with declines in the final trading days of November.

With U.S. legislative changes on the horizon, domestic and international equities continued upward

November 2, 2017

What happened in October?

In a month dominated by political news and anticipated legislative changes, U.S. and international equities continued their march upward, hitting new highs in October.

A narrow passage of the next fiscal year’s budget plan last month opened the door for a tax reform that would lower federal revenue by $1.5 trillion over the next decade. The tax bill’s passage is still in question but generally viewed as a future boost to businesses and corporations. As U.S. equities moved higher, much of the gains were led by technology stocks with the sector gaining 7.7% in October and 35.7% YTD, far outpacing the other U.S. sectors.

The European Central Bank decided to scale back its bond buying program while extending it to September 2018. The move lengthens the program further than expected, but acknowledges that the Eurozone economy is solid. Emerging markets ended the month strong as the dollar’s upward march paused and economic data in those countries bolstered confidence in the asset class.

Equities continued higher amidst little change in data and rising geopolitical risk.

October 3, 2017

What happened in September?

In a month filled with continued geopolitical tumult alongside multiple devastating hurricanes, U.S. equity markets experienced one of the least volatile Septembers in half a century. Historically the most volatile month of the year, this September saw an average daily move of only 0.4% in the S&P 500 Index. The measure of volatility (VIX) in the index slid under 10 after seeing highs above 15 in August. U.S. equities were up 2.0% for the month, bringing the quarterly returns to 4.3% and the YTD to 13.7%. A lack of negative domestic economic news, continued positive international data and sustained high levels of sentiment led the bull market onward.

Across the globe, the MSCI-Emerging Markets Index was down -0.4% as a result of strengthening U.S. yields enticing investors away from the volatile regions and some domestic headwinds, particularly in Turkey and the Middle East. However, emerging market equities continued to be a leader among other assets with YTD performance at 27.8%. The All Country World Index ex-U.S. (ACWI ex-U.S.) ended the month up 1.9%, and 21.1% YTD. 

 

Positive economic data helped offset geopolitical tensions as global equities finished the month with little change

September 1, 2017

What happened in August?

A flurry of positive economic data from across the globe boosted markets in the final trading session of the month, bringing the S&P 500 Index back into positive territory after a volatile August. Aided by the strongest consumer spending growth in over a year, U.S. GDP growth was revised up to 3% in the second quarter, the highest quarterly growth of the economy in over two years.

U.S. Federal Reserve members were in agreement to shrink the central bank’s treasury and mortgage-backed securities holdings. However, slower than expected inflation growth is substantiating questions of whether the Fed will stick to raising interest rates in the final quarter.  For the month, the S&P 500 Index finished +0.3%, and now sits +11.9% YTD.  

Across the globe, the All Country World Index ex-U.S. (ACWI ex-U.S.) inched slightly higher in the month of August, keeping with its strong positive trend and bringing the YTD return to +18.9%. Expectations for the latter half of the year remain optimistic for global markets, particularly in the Eurozone where consumer sentiment hit a 10-year high in August.

 

U.S. economic growth accelerated while corporate earnings pushed record levels to move stocks higher.

August 1, 2017

What happened in July?

Global stocks moved higher in July amid of variety of positive economic indicators. In the U.S., the Commerce Department reported the economy grew at an annualized 2.6% in the 2nd quarter, up from 1.4% in Q1. The lifted growth precedes the current earnings season which, thus far, is exceeding analysts’ expectations. As of July 28th, 57% of the S&P companies had reported earnings with 73% displaying sales above consensus. If this trend holds, it would be a new record for the percentage of companies reporting better sales figures than analysts predicted. Across the globe, economic growth in the Eurozone also accelerated in Q2 while China’s Caixin manufacturing index showed improvement. The positive data boosted U.S. equities with the S&P 500 Index +2.1% in July and +11.6% YTD. The ACWI ex-U.S., an index measuring international stocks, increased +3.7% in the month and now sits at +18.3% for the year. International equities are on pace for their best year since 2009.

 

Stocks softened in June as the Federal Reserve raised lending rates

July 5, 2017

What happened in June?

Stocks softened in June as the Federal Reserve raised lending rates amid a strengthening U.S. and global economy.

U.S. stocks (measured by the S&P 500 Index) moved slightly higher in June, +0.6%, mostly thanks to dividends paid out throughout the month. Investors seem to be in a “wait-and-see” posture, looking for signals from central banks amid strengthening economies. The lack of investor action has kept volatility (as measured by the CBOE Volatility Index) near all-time lows. Technology stocks, (measured by the iShares Dow Jones US Technology ETF) which have been the market’s best producer in 2017, suffered a mild setback in June experiencing a 3.4% loss. Overall, the S&P 500 Index is now +9.3% YTD. Across the globe, international stocks were relatively flat with the MSCI All-Country World ex-U.S. Index +0.3% in June and +14.1% YTD. With the second quarter in the books, focus now shifts to Q2 earnings reports.

 

Corporate earnings and signs of a growing global economy boost equities in May, offsetting falling commodity prices and geo-political turmoil

June 2, 2017

What happened in May?

U.S. stocks (measured by the S&P 500 Index) moved +1.3% in May even though the index experienced its largest one-day decline year-to-date on May 17. The S&P 500 Index is now +8.4% YTD while international equities (MSCI ACWI ex-U.S.) advanced +3.3% for the month and +13.7% YTD.

Q1 profits across corporate America increased at their highest rate since 2011 while the U.S. GDP growth estimate was revised up to 1.2%. The healthy macroeconomic data buoyed stocks while volatility remained near historic lows. The lack of stock price swings can be attributed to a number of factors, including desensitized investors when it comes to turbulent geo-political events or the absence of any substantial change in market-moving data.

 

Stocks advance as strong corporate earnings boost performance

May 1, 2017

What happened in April?

Stocks advanced as strong corporate earnings boosted performance.

With almost 60% of the S&P 500 companies having reported 1st quarter performance thus far, corporate earnings are expected to rise over 10% from the prior year. This positive performance pushed stocks higher in April as optimism for accommodative trade policies, lower corporate taxes and reduced regulation, which were spawned by the Trump administration, began to fade. The equity moves in April represented a 4th consecutive monthly gain in the S&P 500 Index in 2017 and six consecutive positive months overall. The rally experienced a shift in beneficiaries as the large-cap growth names have been the big winners in 2017. The S&P 500 Growth Index is +10% YTD while the S&P 500 Value Index is just under +2%. Small-cap stocks, which were a big winner after the Trump election, have cooled off advancing a modest 1.4% YTD. International equities continued to lead the charge with the MSCI ACWI ex-U.S. +2.1% in April and +10.2% YTD.

 

NorthCoast adds country ETF strategies to solution set

April 17, 2017

NorthCoast Asset Management introduces four international ETF strategies

 

Global Select, International Select, International Select Hedged and Emerging Market Select are the newest offerings by NorthCoast and the firm is excited about the opportunity and timing.  

International equities have been a long-standing research focus of NorthCoast and with the recent underperformance in international markets over the last few years, we believe now is a great time to offer these solutions to investors.” –Dan Kraninger, NorthCoast President  & CEO

Stocks advance in February on positive macroeconomic and technical data

March 1, 2017

What happened in February?

Positive momentum continued in global equities as U.S. and international stocks advanced for a 4th and 3rd straight month, respectively. The S&P 500 Index gained on 18 of the 21 trading days in February. The shortened month witnessed a reduction in negative geopolitical headline noise and continued positive macroeconomic data releases – U.S. consumer prices (key indicator of inflation) increased the most since February 2013, retail sales gained, and existing home sales rose to their highest level in nearly a decade. Across the pond, U.K. unemployment declined to its lowest rate in ten years, Eurozone PMI increased to a six-year high and Chinese factory activity expanded for an 8th straight month.

Post-Election Impact on U.S. Equity Markets

November 9, 2016

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”  

– Ben Graham

 Uncertainty and surprise lead today’s market volatility

U.S. futures were pointed lower this morning and U.S. equity markets are expected to move in volatile action today as a result of the U.S. presidential election. In our position, last night’s election results do not indicate any substantial change of equity outlook in the near term.

NorthCoast Reduces Equity Exposure Ahead of U.S. Election

November 3, 2016

 

What happened in October?

Ahead of the U.S. election and Federal Reserve meetings, global equities retreated in October posting their largest monthly declines since January. Uncertainty across multiple asset classes including equities, fixed income and real estate is pushing volatility measures higher. October also witnessed the mergers of multiple industry titans. Almost a half a trillion dollars of mergers and acquisitions were announced globally, an all-time high.

NorthCoast Remains Bullish Entering 4th Quarter

October 3, 2016

 

What happened in September?

Global equities spent the 1st half of September in a gradual decline as a pending interest rate increase from the Federal Reserve appeared forthcoming. With macroeconomic data displaying a stable, growing economy, regulators have been seeking an opportunity to increase the rate at which institutions borrow money. However, the decision was made to keep interest rates in place. Since then, equities gained to close the month with positive momentum heading into 4th quarter.

Macroeconomic and Technical Indicators Drive Opportunistic Position

June 1, 2016

U.S equities advanced over the final two weeks of May, temporarily dispelling the myth, “sell in May and go away”. The S&P 500 Index increased +1.7%, while the Russell 2000 Index moved +2.2%. The S&P 500 Index now sits +3.3% YTD heading into June. The boost in U.S. equities coupled with positive macroeconomic data has reignited speculation of another rate hike by the Federal Reserve. The U.S.

NorthCoast Optimistic Entering May

May 2, 2016

The U.S. stock market limped into May as the intra-month rally faded over the final two weeks of April. The S&P 500 ended the month +0.35% and sits +1.53 YTD. The Federal Reserve continued to play a “wait-and-see” game in its decision for another rate hike while commodity prices stabilized and the U.S. dollar weakened. As Q1 earnings season concludes, the results provided no clear answer to the strength of the U.S. economy.

Sentiment & Valuation Metrics Indicate Defensive Posture

March 1, 2016

After declining almost 6% to start February, the S&P 500 index has rallied over 7% since February 12 to finish the month nearly flat at -0.2% return. The index remains negative for the year at -5.2%.

Much of the fear and uncertainty that “strong-armed” equities in January has temporarily subsided.

 Major oil producers around the globe continue to seek agreements in limiting supply to increase prices

Equities Rebound in October

November 2, 2015

Global stocks regained footing in October with the S&P 500 rallying +8.4% and the All-Country World Index ex-U.S. (ACWI ex-U.S.) adding 7.4%, their largest monthly gains in four years. Much of the gain can be attributed to the overreaction to market sell-offs in August, coupled with central banks reaffirming enhanced stimulus efforts to bolster global markets.

This is the Plan

August 26, 2015

For over a quarter century, NorthCoast has been mindful of one key principle, creating a good long-term track record is more often built by avoiding losses as opposed to booking big gains. Every year since our founding in 1988, we have offered tactical investment portfolios that move to cash in an effort to avoid steep losses. It was this belief, coupled with our long-term performance that attracted Investor’s Business Daily (IBD) to partner with us in January 2006. We proved our mettle during the bear markets of 2000-2002 and 2008-2009 by preserving capital in client accounts.

Change Your Focus / Change Your Future

August 21, 2015

In the midst of the stock market's swoon, it's important to keep things in perspective. Let's look back at recent history:

Does 7/7/11 – 10/4/11 look that scary now? -20.8% peak to trough (drawdown) on S&P 500 over a 3-month period... It traded higher by the end of February 2012.

What about the October 2014 correction, 9/19/14 – 10/15/14? Does that look scary now?  -9.4% peak to trough... Traded higher by mid-November 2014.

March Madness

April 7, 2015

by NorthCoast President & CEO, Dan Kraninger

Your biggest opponent isn’t the other guy. It’s human nature.” - Coach Bob Knight
With 43 years of coaching and over 900 wins under his belt, I’m inclined to take note when Bobby Knight talks about what it takes to win in March. It’s easy for me to see how emotions like fear, conceit, pride, and anxiety can creep into locker rooms and prevent teams from reaching their ultimate goals.

The President's Post

January 16, 2015

By NorthCoast President & CEO, Dan Kraninger

The only function of economic forecasting is to make astrology look respectable.

                                                                        --  John Kenneth Galbraith

October 2014 Market Update

October 30, 2014

Overview

Since October 1, the market has declined approximately 8% off its all-time highs. Our portfolio management team has provided three (3) key elements to the recent correction and what it possibly means moving forward.

1. Putting the recent pullback into perspective

The VIX Index (~ fear Index) is at its highest point over the past two years and makes incursions into this territory about once per quarter. In each instance, the market pulled back before resuming its ascent once the fear subsided and the VIX came back to a normal level.

NorthCoast Remains Bullish Heading into Final Quarter

October 1, 2014

"Conviction is worthless unless it is converted into conduct." - Thomas Carlyle

 

After a relatively volatile quarter, equities (S&P 500) ended with a 1.0% gain. A sell-off in July was quickly erased with an almost 4% run in August. September finished -1.5%, mostly on the angst of the global economic recovery and geopolitical tensions. Despite the headlines, the S&P 500 remains positive at +7.8% YTD and the All Country World Index (ACWI) at +3.7% YTD.