by Louis Navellier
January 10, 2023
You may have noticed in December how illiquid the overall stock market has been. This is a good time to warn you that many small-to-mid capitalization stocks are “bunny stocks,” that is, they like to “sit” a spell and then “hop” four times a year around their quarterly earnings announcements. The rest of the time, algorithmic trading systems from Citadel and Virtu Financial are running “mean reversion” programs to create stock movement to stimulate trading and “shake out” uncertain investors. The good news is that these stock market algorithms tend to disappear around earnings announcement season!
I want you to enjoy the upcoming earnings announcement season, since I expect that it will be every stock for itself in the upcoming weeks. The overall stock market is grossly oversold, as demonstrated by the fact that my small-to-mid capitalization stocks are trading at 6.8 times median current earnings and just 2.8 times median forecasted 2023 earnings. Clearly, the price to earnings (P/E) compression has become ridiculous and relentless, as many Tesla shareholders have learned since last May, when Tesla was kicked out of the S&P 500 ESG index, which resulted in relentless institutional selling pressure.
As major tech stocks fall in weight in the S&P 500, it triggers more systematic selling pressure as the tracking managers that dominate Wall Street trading are forced to cut their technology exposure. When the technology bubble burst back in March 2000, the institutional selling pressure persisted for seven years. Back then, small-to-mid capitalization stocks in the tail end of the S&P 500 became new market leaders. That is effectively where we are now, since I expect small-to-mid cap stocks to lead the way!
We are now at the time of year when a January effect often occurs, and small-to-mid cap stocks become new market leaders. If my small-to-mid cap stocks follow their forecasted earnings higher, they could easily appreciate 100% or more in 2023. If forecasted median 2023 price-to-earnings ratios expanded from 2.8 to 5.6 times earnings, then our small-to-mid cap stocks could appreciate 200% or higher. As a result, 2023 is shaping up to be a potentially incredible year for my small-to-mid-cap stocks! I should add that both Perion Network Ltd. (PERI) and Lamb Weston Holdings (LW) surged in the wake of their quarterly earnings announcements last week, so we have a lot to look forward to in the upcoming weeks!
Economic Statistics Point Toward Possible Recession
The economic weathervane is pointing more toward recession. Last Wednesday, the Institute of Supply Management (ISM) reported that its manufacturing index declined to 48.4 in December, down from 49 in November for the second straight month that the ISM manufacturing index has been below 50, which signals a contraction after 30 straight months of expansion. Only 2 of the 15 industries surveyed reported expanding in December. They were Primary Metals and Petroleum & Coal Products.
On Friday, ISM announced that its non-manufacturing (service) index plunged to 49.6% in December, down substantially from 56.5 in November. This is the first time in 30 months that the ISM service index fell below 50, signaling a contraction. Some of the ISM service components than plunged were the new orders component, dropping to 45.2 in December, down from 56 in November, while business activity slipped to 54.7 in December, down from 64.7 in November. In the wake of this ISM data, Treasury yields fell and there were rumblings that the Fed may stop raising interest rates sooner than previously expected.
Speaking of the Fed, the latest FOMC minutes were released on Wednesday, including the shocking statement that, “An unwarranted easing in financial conditions,” especially if driven by a misperception by the public of how the Fed would react to economic developments “would complicate the committee’s effort to restore price stability.” Translated from Fedspeak, the FOMC members do not like stock market rallies, since they fear it could result in potentially inflationary consumer spending.
The FOMC minutes also revealed that the Fed foresees inflation staying higher, and 17 of 19 FOMC members in their “dot plots” favored raising the Fed funds rate to 5% in 2023. So overall, it appears that the Fed will raise key rates to 5% and then hold them there for all of 2023. I should add that the FOMC minutes provided no insight on whether the Fed would raise rates by 0.25% or 0.5% on February 1.
Interestingly, Minneapolis Fed President Neel Kashkari, in an essay published on Wednesday, said that the FOMC could pause after reaching a peak rate of 5.4%. Specifically, Kashkari said, “Wherever that end point is, we won’t immediately know if it is high enough to bring inflation back down to 2% in a reasonable period of time,” and added, “Any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher.” (What is most interesting to me about Fed President Kashkari, other than he used to run the TARP program after the 2008 financial crisis, is that he used to be a dove, but has clearly turned into a hawk.)
In other financial news, ADP reported on Thursday that private payrolls rose by 235,000 in December, which was substantially better than the economists’ consensus expectation of 153,000. Leisure and hospitality jobs led the way as service industries added 213,000 jobs, while the good producing, manufacturing sector added 22,000 jobs. Interestingly, ADP also reported that pay rose by 7.3% in 2022, led by a 10.1% increase in leisure and hospitality jobs.
In the more widely followed Friday jobs report, the Labor Department announced that 223,000 payroll jobs were created in December, which was better than the economists’ consensus expectation of 203,000. The unemployment rate declined to 3.5% in December from a revised 3.6% in November, due predominantly to a shrinking workforce, as 231,000 workers actively looking for a job left the workforce.
In addition, the November job total was revised down to a 256,000 increase from 263,000. Average hourly earnings improved by 0.3% or 9 cents, to $32.82 per hour. Over the past 12 months, average hourly earnings rose 4.6%. Interestingly, the average hourly workweek declined to 34.3 hours, while the labor force participation rate was 62.3%. Overall, slower average hourly earnings are indicative that wage inflation is continuing to cool off, so the December payroll report was well received by financial markets.
The Commerce Department announced on Thursday that the U.S. trade deficit posted the steepest monthly decline (since February 2009) in almost 14 years as imports declined 6.4% to $313.37 billion and exports fell by 2% to $251.86 billion. Clearly, the “velocity of money” is grinding to a halt as many overseas nations slip into a recession. Ironically, a shrinking trade deficit boosts U.S. GDP growth, so the Atlanta Fed is now estimating that the U.S. economy grew at a 3.9% annual pace in the fourth quarter.
The Labor Department reported on Thursday that weekly jobless claims declined to a 3-month low of 204,000 in the latest week, compared to 225,000 in the previous week. Continuing unemployment claims declined to 1.694 million compared to 1.718 in the previous week. I should add that Amazon’s announced 18,000 job cuts were not reflected in these jobless claims and could show up in the upcoming weeks. I suspect that as long as unemployment remains low, the Fed will keep its focus on the inflation front.
The Many Reasons for a Contracting Crude Oil Price
China’s economic activity is still contracting, based on its official Caixin Purchasing Managers Index (PMI), which slipped to 49 in December, down from 49.4 in November. Analysts at Nomura said, “A large wave of Covid inflections has swept across the country since early December, which resulted in a sharp disruption to mobility, shipment and business activity.” This all puts a damper on energy demand.
That is the bad news. The good news is that as the Chinese population achieves “herd immunity” after recovering from the latest Covid variant, their economic activity should increase in the upcoming months.
Russia remains a wild card for the global economy and energy markets around the world. Despite an anticipated 12% Russian crude oil production cut, India has become the primary winner from the chaos, since India is refining Russian crude oil and exporting refined products (e.g., diesel, heating oil, jet fuel, and gasoline) back to Europe and other countries.
Turkey is another winner from the Russian chaos, since its exports rose 13% to $254 billion as Turkey refused to comply with Western sanctions on Russia. Inflation has been running at an 80% annual pace in Turkey as the country’s unorthodox monetary policies have caused inflation to spiral out of control. However, a weak Turkish lira has also helped the country boost its exports. The U.S. has also been a winner from the Russian chaos, but the Biden Administration’s sale of over 180 million barrels of light sweet crude oil from the SPR is expected to cease abruptly, which I anticipate will cause oil prices to rise as seasonal demand picks up. As a result, I expect my big energy bet to pay off in the upcoming months.
Crude oil prices declined last week, due partly to China demand fears; but when seasonal demand picks up in the upcoming months, crude oil prices should rise steadily. The big energy story last week was that natural gas prices remain very low due to unseasonably warm winter weather in both Europe and the U.S. Outside of the energy sector, expectations for earnings remain very low due to difficult year over year comparisons as well as a strong U.S. dollar impeding multinational companies.
I also expect the blowback against ESG investing to persist, since all those ESG portfolios in blue states and at major universities that shunned fossil fuels had a rude awaking last year. Fossil fuels accounted for approximately 84% of the world’s energy output in 2022, up from 80% in 2020. The International Energy Agency said that coal consumption likely hit an all-time record in 2022, due somewhat to the fact that Germany reactivated many of its closed coal plants, plus all the new coal plants in China and India.
Some Product Highlights at the Las Vegas Consumer Electronics Show
The Consumer Electronics Show (CES) in Las Vegas can often help to boost the stock market as new consumer products and EVs are announced. Although consumer spending on big ticket items is waning, companies keep trying to get folks excited. One product I found interesting is a new Samsung 76-inch micro-LED television. Micro-LED TVs are supposed to replace OLED sets in the upcoming years as costs fall. China’s TCL is following Samsung to develop micro-LED technology. In the meantime, more OLED televisions are now available, including a new 77-inch OLED from Samsung, so OLED televisions will continue to capture market share until micro-LED prices fall.
Nvidia is also making a splash at CES by showing off new graphics cards for gamers as well as teaming with Foxconn on EVs. Specifically, Foxconn will be using Nvidia’s Drive Hyperion platform for the EVs it builds for Lordstown Motors and other companies. Nvidia is now making more sensors as well as the software auto manufacturers need for autonomous driving.
In my opinion, Nvidia systems that use LIDAR are superior to Tesla’s autonomous software that utilizes cameras (with no LIDAR) that do not work well in the snow, fog, smoke, or heavy rain. Here is a video that shows that Tesla’s autonomous software does not work well in the snow.
Navellier & Associates owns Nvidia Corp. (NVDA), Perion Network Ltd.(PERI), and Lamb Weston Holdings Inc. (LW) and a few accounts own Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Nvidia Corp. (NVDA), Perion Network Ltd.(PERI), and Lamb Weston Holdings Inc. (LW) via a Navellier managed account and Nvidia (NVDA), in a personal account. He does not own Tesla (TSLA), personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Which Stocks Will Win (or Lose) This Earnings Season?
Income Mail by Bryan Perry
The Market Seems Ready to Pivot Higher on an Inflation Epiphany
Growth Mail by Gary Alexander
Which Will it Be – Another Roaring 20s, Or Stagflationary 70s?
Global Mail by Ivan Martchev
As January Goes, So Goes the Year (Sort of)
Sector Spotlight by Jason Bodner
Low-Volatility and Large Spreads: Who Could Like That?
View Full Archive
Read Past Issues Here
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.
Important 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 a 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.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
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 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 holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and 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 every investor. 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. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
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 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.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.