June 4, 2019

The aftermath of the European Parliament elections is still being evaluated, but a couple things are very clear. First, a vote for the European Parliament became a referendum on each country’s leaders and, by and large, existing leadership was dealt a stunning blow by populist movements. Second, the cloud of uncertainty over the European Union (EU) persists. Brexit is still on track for an October 31st exit, multiple countries are likely to violate the EU’s budget restrictions, and continued capital flight will cause U.S. Treasury yields to continue to fall. (I explained this concept in more detail in my latest podcast.)

There is no doubt that the populist movement led by the Brexit Party in Britain and the green movements in continental Europe are breaking up the ruling class in Italy and Spain and perhaps France and Germany as well. As a result, Marine Le Pen’s euro-skeptic National Rally party achieved the majority of votes in France and the Greens (Les Verts) scored an impressive third, so French President Emmanuel Macron (whose centrist party took second place) now faces a formidable political challenge from both sides, as well as the national “yellow-vest” protests. German Chancellor Angela Merkel’s Christian Democratic Union lost substantial seats to the Social Democratic Party and the Greens, so her successor is in doubt.

With the leadership of Britain, France, Germany, Italy, and Spain in chaos after recent elections, selecting a new leader of the European Commission to replace Jean-Claude Juncker will be next to impossible, since ruling coalitions are in disarray and new elections will likely be forthcoming. Furthermore, French President Macron and German Chancellor Merkel disagree on who should run the European Commission.

When you throw in Brexit in the upcoming months, the continued disintegration of the European Union looks inevitable. Naturally, this weakens the British pound and euro, so the U.S. dollar continues to strengthen as the preferred reserve currency. Furthermore, since interest rates in the EU are negative in many countries, capital flight continues to put downward pressure on Treasury yields.

In the meantime, many of the ousted and wounded ruling elite are holed up in Montreux, Switzerland on the shores of Lake Geneva for the Bilderberg Group summit. Some of the attendees include former U.S. Secretary of State Henry Kissinger, former CIA Director David Petraeus, former Secretary of Defense James Baker, and former Treasury Secretary Robert Rubin. Other interesting attendees include Roger Altman (Evercore), Dominic Barton (McKinsey & Company), Mark Carney (Bank of England), Niall Ferguson (Hoover Institution), Mary Kay Henry (SEIU), Stephen Kotkin (Princeton), Henry Kravis (KKR), Jared Kushner (The White House), former Senator Claire McCaskill (NBC News), Eric Schmidt (Google founder), Jens Stoltenberg (NATO Secretary General), Peter Thiel (Thiel Capital), and former Daimler Chairman Dieter Zetsche (Mercedes). These influential people from very powerful organizations must now try to make sense of what the world will look like as populist movements sweep the globe.

As I discussed in last Wednesday’s podcast, my simple conclusion is that the U.S. is the clear winner as you look around the world. The U.S. has (1) the largest and strongest economy, (2) the strongest central bank, and (3) a strong, colorful leader who is a cheerleader for the U.S. economy. President Trump is now doing what China has been doing for years. He has effectively “weaponized” the U.S. economy and is expected to continue to prevail in the Chinese trade spat. The U.S. dollar is clearly the preferred reserve currency in the world. Since commodities are priced in U.S. dollars, deflationary pressure is expected to spread, as collapsing crude oil prices have been demonstrating in recent weeks. Furthermore, negative interest rates in Japan and continental Europe will continue to push U.S. Treasury yields lower.

I feel that it is now inevitable that the Fed will have to cut key interest rates as market rates continue to decline. The fact that the Treasury yield curve is inverted is just temporary, since the Fed does not want its Fed Funds rate to interfere with market rates. As a result, I now expect that the Fed will openly debate a key interest rate cut at its upcoming Federal Open Market Committee (FOMC) meetings.

GDP Up 3.1%, Consumer Confidence Sky-High, but Home Sales Down

The economic news last week was mixed, but net positive. The good news was that the Conference Board on Tuesday announced that its consumer confidence index surged to 134.1 in May, up from 129.2 in April and is now at the highest level in six months. Some of the consumer confidence components were even more impressive, such as the “present situation” index, which rose to an 18½ year high of 175.2 and the “future expectation” index, which rose to 106.6 in May (up from 102.7 in April). Naturally, high consumer confidence bodes well for continued strong retail sales and GDP growth in the quarter.

The Commerce Department reported on Thursday that first-quarter GDP was revised down slightly to a 3.1% annual pace (from the 3.2% previous estimated) due to slower-than-expected business investment, which grew 2.3%. Corporate profits declined 2.8% in the first quarter, which is the biggest decline since 2015, but profits have risen 3.1% in the past 12 months. This is the second quarter in a row that corporate profits have declined. The average company in the S&P 500 is now characterized by contracting operating margins, as most earnings are now growing slower than sales. The other drag on first-quarter GDP growth was durable goods orders, which declined 4.6%, the biggest decline in 10 years.

The bright spot in the first-quarter GDP was that exports rose 4.8%, while imports only increased by 2.5%, so the trade deficit was less of a drag on overall GDP growth. The Atlanta Fed is currently estimating second-quarter GDP growth at a 1.3% annual pace, but frequent revisions are common; so if retail sales remain strong, I expect at least 2% annual GDP growth in the second quarter. We could see a higher GDP if China commits to fair trade, but their GDP will fall sharply if they remain stubborn on their indefensible position of not respecting intellectual property rights through product piracy.

The bad news was that the National Association of Realtors on Thursday reported that pending home sales declined 1.5% in April, which was well below economists’ consensus estimate of a 0.5% decline. This marks the 16th straight month where pending home sales have declined on a trailing 12-month basis. Only the more affordable Midwest saw pending home sales rise 1.3%. Despite the fact that median home prices are moderating and mortgage rates are falling, the inventory of existing homes for sale remains tight. However, due to falling interest rates, existing home sales should improve in the upcoming months.

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives