by Louis Navellier
January 11, 2022
So far this year, energy and financial stocks have been the leaders. The recent weakness in NASDAQ even caused CNBC’s Jim Cramer to imply that growth stocks will lag in 2022 and value stocks will outperform. The biggest problem I have with Cramer’s “value declaration” is that it will soon be proven obsolete when the fourth-quarter announcement season commences and it’s “every stock for itself.”
Semiconductor stocks are expected to announce the strongest fourth-quarter results in years. The Consumer Electronics Show (CES) is now underway and most of the latest and greatest consumer products – like televisions, virtual reality, video games, 5G, and electric vehicles – now require more high-powered semiconductor chips than ever. If you have any spare cash to invest, I strongly recommend that you buy some of my favorite semiconductor stocks, like KLA Corporation (KLAC), Kulicke & Soffa Industries (KLIC), NVIDIA Corp. (NVDA), and United Microelectronics Corporation (UMC).
Another big deal at CES was the many new electric vehicles (EVs), like the Chevy Silverado pickup. Sony is also getting into the EV business, and the Mercedes Vision EQXX offers a 620-mile range.
All of these new EVs are still two or more years away from production due to an acute shortage of lithium-ion batteries. In fact, even though Ford is now in the process of almost doubling the production of its F-150 Lightening from 80,000 to 150,000 per year, it still cannot compete with Tesla, which just made over 300,000 EVs in the fourth quarter! The reason is that Tesla’s Shanghai plant is making EVs with less efficient but cheaper iron-phosphate batteries made by CATL. In the U.S., Tesla is still utilizing Panasonic’s lithium-ion batteries, but CATL’s batteries increasingly dominate its international sales. Right now, Tesla’s competitors are waiting for the production of lithium-ion batteries to increase, so they are losing potential EV sales until battery production catches up with demand.
America’s appetite for electronics will not diminish – and that will fuel NASDAQ and the tech recovery.
This appetite for new technology also likely caused the trade deficit to soar in November. The Commerce Department reported last week that the trade deficit rose to $80.2 billion in November, nearly reaching an all-time high. Imports surged 4.6% to $304.4 billion in November, while exports rose by only 0.2% to $224.2 billion. The good news is that this robust consumer demand is positive for GDP growth.
The Atlanta Fed revised its fourth-quarter GDP estimate last Tuesday to an annual pace of 7.4%, down slightly from its previous estimate of 7.6%. Combined with strong U.S. dollar windfall profits for multinational stocks and this is setting us up for a truly outstanding fourth-quarter announcement season.
As any stock market climbs higher, the leadership typically becomes narrower, so the institutional buying pressure is anticipated to chase fewer stocks as year-over-year comparisons become more difficult. Our fundamentally superior growth stocks are poised to continue as market leaders. Superior fundamentals are very important as the stock market becomes more selective. We have seen many stocks appreciate in excess of 100% since 2020 and many more growth stocks should break out in the upcoming months!
What was most impressive about the latest NASDAQ rallies is how our growth stocks rebounded on light trading volume, which brings up the question of how well they will perform on higher trading volume.
What “Easy Money” Means to Corporate America
You may wonder why so many companies with strong cash flow also float so many robust corporate bond offerings. It’s because companies can borrow at interest rates that are well below the rate of inflation and then turn around and buy back their own shares for a greater return on equity. Wall Street does not care if it sells stocks or bonds. Despite all the news reports that some billionaires (like Tesla’s Elon Musk and Microsoft CEO Satya Nadella) are selling a record amount of stock, stock buy-backs also hit a record high in the third quarter and were also likely strong in the fourth quarter. New stock offerings will likely suffer, but corporate bond offerings will likely remain robust, so stock buy-backs are expected to remain strong.
This year is expected to be characterized by a passive Fed that will keep Treasury bond yields well below inflation. Although the Fed is expected to increase short-term interest rates, based on the Federal Funds Rate, from 0% to 0.75%, the fact that interest rates will remain well below inflation should cause millions of new investors to turn to the stock market in search of inflation protection as well as higher yields. In other words, this “Goldilocks” environment of low interest rates and steady growth is expected to persist.
Although the Fed is in the early innings of their Modern Monetary Theory (MMT) experiment, their massive money printing – which Japan and continental Europe pioneered – has yet to cause interest rates to rise much. We still have higher rates in the U.S. than Europe or Japan, which attracts foreign capital and helps strengthen the dollar. International buying pressure represented 69% of the bids at the most recent 10-year Treasury auction, which is one reason why the Fed can reduce their quantitative easing.
By late 2022, the stock market will become increasingly distracted by the mid-term elections, after which the leadership in Congress is expected to change. Then, if the Biden Administration decides to cooperate with the new Congress, like Bill Clinton did, that could save Joe Biden’s legacy. Wall Street usually loves gridlock. That means the political environment should soon be much more favorable for growth stocks.
This is a good time to remember that our small- to mid-capitalization growth stocks are “bunny stocks” that typically “hop” around at quarterly announcement time, so I fully expect that our patience will be rewarded in the upcoming weeks as wave after wave of better-than-expected results are announced.
Navellier & Associates owns Nvidia (NVDA), Microsoft (MSFT), Ford, (F), KLA Corporation (KLAC), Kulicke & Soffa Industries Inc. (KLIC) and United Microelectronics (UMC), in managed accounts. One clients owns Tesla (TSLA), per client request in managed accounts. Louie Navellier and his family personally own Nvidia (NVDA), Microsoft (MSFT), Ford, (F), Kulicke & Soffa Industries Inc. (KLIC), and United Microelectronics (UMC), via a Navellier managed account and Nvidia (NVDA) in a personal account, but do not own KLA Corporation (KLAC), Tesla (TSLA).
Last Week’s Economic News Was Mixed – and Slightly Mixed Up!
The economic news last week was mixed. The Institute of Supply Management (ISM) announced on Tuesday that its manufacturing index decelerated to 57.8 in December, down from 61.1 in November. Although this is a 16-month low, any reading over 50 signals an expansion. The new orders and backlog of orders components both remain above 60 and bode well for continued strong manufacturing growth, as 15 of the 18 industries surveyed in the manufacturing sector reported an expansion in December.
On Thursday, ISM reported that its non-manufacturing (service) index declined to 62 in December, down sharply from its record-high 69.1 in November. Although this appears to be a sharp deceleration in service activity, the truth of the matter is that any reading above 50 signals an expansion, so it appears that the ISM service slowdown is likely related to the Omicron disruption. Furthermore, all 16 service industries that ISM surveyed reported an expansion in December, so the service sector remains healthy.
Turning to jobs, this is where the numbers seem a bit “mixed up.” ADP reported on Wednesday that 807,000 new private payroll jobs were created in December, substantially higher than the economists’ consensus expectation for 375,000 new jobs and four times Friday’s number. ADP also revised its November payroll report to 505,000, down from 534,000. Leisure and hospitality led the December job tally with 246,000 new jobs, so it appears that the Omicron variant is not hindering most hiring plans.
By contrast, the Labor Department announced on Friday that only 199,000 payroll jobs were created in December, which is substantially lower than economists’ consensus estimate of 422,000 – even though the October and November payrolls were revised up by a cumulative 141,000, to 648,000 (compared to 546,000 previously estimated) and 249,000 (compared to 210,000 previously estimated), respectively.
The unemployment rate declined to 3.9% in December and the labor force participation rate remained unchanged at 61.9%. Average hourly earnings rose by 0.6% or 19 cents to $30.31 per hour. In the past year, average hourly earnings are up 4.7%, which is down slightly from a revised 5.1% rise in November.
So, what’s the truth about the jobs increase? It appears that the Labor Department is slow in calculating payroll jobs, especially compared to ADP, due to big upward revisions in previous months. The big news is that average hourly earnings are not growing as fast as inflation and the workforce continues to shrink.
Interestingly, the Labor Department also announced on Tuesday that 3% of all workers quit their jobs in November, up from a 2.8% quit rate in October. This higher-than-normal quit rate is predominantly associated with lower-priced jobs and is likely indicative of a tight labor force looking for higher wages elsewhere. This high worker turnover will likely boost payroll job growth a bit throughout 2022.
Also, the Labor Department on Thursday announced that new unemployment claims in the latest week came in at 207,000, up slightly from a revised 200,000 in the previous week. Continuing unemployment claims in the latest week came in at 1.754 million compared to a revised 1.718 million the previous week. Economists were expecting weekly and continuing unemployment claims to come in at 195,000 and 1.678 million, respectively, so unemployment claims are suddenly higher than economists anticipated. This may just be statistical noise, but that will be confirmed in next week’s revisions.
The bad news in all this good news is that the financial media cannot see the forest for the trees and continues to spook investors. The latest scare occurred on Wednesday when the December Federal Open Market Committee (FOMC) minutes were released revealing some anxiety, with statements that warned about lifting short-term interest rates “sooner or at a faster pace than participants had earlier anticipated.”
However, other FOMC officials thought that the Fed should reduce its tapering (e.g., quantitative easing) rate before raising key short-term interest rates! So, translated from Fedspeak, the Fed is still not expected to begin raising key short-term interest rates, namely the Federal Funds rate, until March or later.
In the end, the financial markets are grossly overreacting to a 0.25% rate hike that is fully anticipated!