|September 20, 2019||
How are you expecting U.S. equities to finish out the year?
Our global tactical asset allocation model still indicates a cautiously bullish outlook for the U.S stock market in the near-term. However, the long-term signals have decreased recently. The short-term targeted equity level at the moment is around 90% while the long-term signals indicates a target level of about 70%. An area of concern is that the probability of a recession has slightly grown. We monitor a number of data points to help determine the probability of a recession. For example the yield curve, which went into a deeper inversion, contributed to the elevated odds.
However, we don’t expect a recession to occur in the near future since the macroeconomic data points we monitor are still relatively upbeat. Industrial production rose 0.6% in August, its third increase in the last four months. The total capacity utilization also rose 0.4%. Some macroeconomic and sentiment figures are less optimistic including the labor market and PMI data. The labor market moderated further in August. Payrolls increased by 130,000 jobs, bringing average growth to 158,000 per month this year, far below the 2018 pace, confirming suspicions that the pace of hiring has cooled. Also, U.S. PMI data has been decreasing every month since March this year. In August, the PMI data indicated that the U.S. manufacturing sector is contracting for the first time since the end of the energy rout. The ISM manufacturing index fell from 51.2 in July to 49.1 in August, the lowest reading since January 2016 and below the neutral threshold level of 50.
|January 8, 2019||
Q4 | Equities experienced one of their worst Octobers in a decade when major indices fell over -16%. The almost +3% move over the final two days of the month buoyed stocks for a temporary relief but they still finished the month down almost -7%, the index’s worst month in 7 years. 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. The brief pullback provided a small buying opportunity as we increased exposure to 88%, a final high point on the year. As equities experienced a modest bump in November, we removed exposure in anticipation of further decline to end the year. We entered December with 30% cash and reached a high cash level of 35% after the 1st week of trading. Then as stocks continued to trade negatively with major volatility, we marginally increased our equity exposure throughout the month as valuations became more attractive along with the lack of real economic data warranting a substantial decline.
|January 1, 2019||
What is your outlook for the U.S. equity market for 2019?
Our global tactical asset allocation (GTAA) model still signals a relatively bullish outlook for the U.S. equities. Strong readings in sentiment and valuation indicators outweigh weaker technicals and recent price pullbacks.
In 2018, the U.S. economy enjoyed a banner year with real GDP annual growth rate on track to increase by close to 3%, which is the strongest gain of the nearly decade-long expansion. We believe the deficit-financed tax cuts and government spending increases will continue to help the economy grow much of next year. We also expect the labor market to continue to grow and unemployment to stay low by historical standards.
Despite these positive signals, we do recognize some possibilities of weakness moving forward. The stimulus effect might fade and put downward pressure on the market in the longer term and diminishing labor supply might result in gradually decreasing prices. The ceasefire between the U.S. and China may indicate that the worst of the escalations are behind us. However, the trade tension remains and might contribute to equity volatility. We do expect some market volatility to continue through 2019 despite our model indicating that the odds of a near-term recession remain relatively low.
|October 8, 2018||
Q3 | 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. Lagging growth abroad was a point of concern with important events such as Brexit decisions and trade discussions on the horizon. Domestically, the economy remained strong but trade uncertainty still casted a shadow. Technology stocks and more positive economic data bolstered U.S. equities in August despite continued trade uneasiness. The bull market became arguably the longest on record in August. The Federal Reserve would raise rates again in September, the 3rd time this year, putting pressure on bond issuances with higher borrowing costs, stoking fear of possibly less private-sector investment. Despite only a modest rise in September, the S&P 500 had its best quarterly return since 2013. The strong quarterly returns for U.S. equities were a sign that investors were prioritizing the solid corporate earnings and positive economic data over global trade tensions. Throughout Q3, we averaged an 80% equity exposure.
|July 8, 2018||
Q2 | Our model recognized elevated levels of risk in the equity market and we reduced exposure accordingly, reaching a 70% equity exposure at the end of April and maintaining that posture into June. Among the key indicators, only the macroeconomic data remained bullish during this stretch. P/E multiples continued to make equities overpriced versus historical averages, a relatively low volatility index (VIX) predicted possible complacency in the bull run and key consumer surveys, such as the University of Michigan Consumer Sentiment survey, decreased over multiple months. Sentiment data provided a cautiously optimistic stance as U.S. consumers, now with reported higher wages, were more upbeat about their current financial situations. Alternatively, the U.S. administration’s additional tariffs on China raised trade concerns which could increase uncertainty and dampen the collective consumer and producer sentiment. The late June pullback provided a buying opportunity and we increased our exposure to 80% to close out the quarter.
|April 5, 2018||
Q1 | January saw both a very hot start to the year for equities as well as the largest daily decline since August of last year. Low yields had been supporting the sky-high equity valuations but, as bond yields increased, they began to impact our outlook on future return potential. With early risks of 2018 taking shape, we began to decrease exposure from 95% to 85%. At the end of January into February, the market sold off, declining almost 8% in just over a week. Viewed as an overreaction, we sent out research explaining our continued opportunistic position (“An Expected Change in Volatility”). Markets rebounded over the next month. Overall, the first quarter experienced a large increase in market volatility and surprising headline risk. However, our outlook remained positive. Beneath the headlines, fundamentals remained strong with the U.S. and global economies expanding along with corporate earnings. Aided by rebounding producer and consumer survey results and long-term market momentum, the majority of macroeconomic, sentiment and technical indicators were positive.
|October 24, 2017||
Over the third quarter of 2017, the NorthCoast Growth strategy was up 2.8% net of fees, while the S&P500 Index was up 4.3%.
Running an attribution versus the S&P500 Index, we generate three estimates of the impact on performance from cash allocation, sector allocation and stock selection.
First, we consider cash allocation for the quarter, which averaged 15.5% and had an impact of -0.7% on the relative strategy performance. This underperformance was due to the portion of the allocation not participating in the equity uptrend that continued over the course of the quarter. While cash helps protect assets in down-trending markets, it is a hindrance when equities rise. This is a strategic trade-off when utilizing a cash scaling technique. You can read more about the way we scale to cash here.
Second, we breakdown the largest allocation differences versus the S&P500 Index, which were overweight Financials and Health Care and underweight Energy, Information Technology and Utilities. Overall, our sector allocation decisions had a +0.02% impact on the relative performance. The small positive contribution was helped by a positive quarter for financials, but hurt by lackluster returns in domestic healthcare.
Finally, we inspect the contribution from stock selection. The contribution was positive in Consumer Discretionary, Consumer Staples and Industrials while negative in Financials, Health Care and Information Technology. The stock selection effect was a negative contributor to the performance of the strategy with a -0.6% hit to relative performance.
|November 1, 2012||
NorthCoast Growth seeks long-term growth with downside risk protection through the implementation of a repeatable 3-step process: