January 22, 2020
I have been writing a lot recently about some imbalances in this market, specifically about some stocks that are in a “bubble” condition, and the many stocks that aren’t making money. That does not mean the whole market is overvalued, just that some stocks might be getting “ahead of their skis,” as they say.
Here are some of my reasons why this market looks a lot like 1999:
First, the S&P 500 is increasingly dominated by a few big technology stocks. Not only does the tech sector represent approximately 29% of the S&P 500, but just five technology stocks, namely Apple, Alphabet (Google), Amazon, Facebook and Microsoft, now account for about 18% of the S&P 500. This is similar to 1999. By March 2000, seven giant technology stocks grew to be 54% of the S&P 500!
Navellier & Associates does not own Apple, Alphabet (Google), Amazon, Facebook, and Microsoft in managed accounts and our sub-advised mutual fund. Louis Navellier and his family own Apple, and Amazon, but do not own Alphabet (Google), Facebook, and Microsoft in personal accounts.
Today, we have a top-heavy market in which over $4 trillion in Environmental, Social, and Governmental (ESG) funds are systematically pouring money into technology stocks and making monopolistic tech companies even bigger, bloating their capitalization weighting within the S&P 500 and NASDAQ 100.
Although capitalization-weighted indexes ignore fundamentals, eventually one of these giant technology stock bubbles will be “pricked,” so the question is, when will that happen? My best guess is sometime in 2021, after the Presidential election, and possibly after another Fed key interest rate hike.
Second, as I mentioned last week, the fact that approximately 40% of the stocks in the S&P 500 and 75% of the IPO market, according to The Wall Street Journal, do not have positive earnings, means that some of these money-losing stocks could trigger a correction, especially now that U.S. manufacturing activity is at a 10-year low, partly due to Boeing’s woes and a glut of vehicles for sale.
Navellier & Associates does not own Boeing in managed accounts and our sub-advised mutual fund. Louis Navellier and his family do not own Boeing in personal accounts.
Third, China is still struggling. Its vehicle sales plunged 8.2% in 2019 to 25.8 million vehicles. This was the second straight year that vehicle sales contracted in China, which is now impacting global growth, especially German industrial production and factory orders. Although “Phase One” of the U.S. trade deal with China was signed last week and the U.S. officially removed China as a “currency manipulator,” China’s supply channels have been disrupted and its exports to the U.S. plunged 21% last year, so it will be interesting to see if China gets its mojo back, or will it be permanently impacted by the U.S. trade tiff.
Tesla’s Sales Suffer While its Stock Soars
Speaking of slowing vehicle sales, Tesla is apparently continuing to struggle in the U.S., since registrations in its biggest domestic market, namely California, plunged 46.5% during the fourth quarter, according to a Dominion Cross-Sell report, which collates data from state motor vehicle records. In the third quarter, Tesla’s U.S. sales plunged 39% compared to a year ago, but its international sales surged.
Navellier & Associates does not own Tesla in managed accounts and our sub-advised mutual fund. Louis Navellier and his family do not own Tesla in personal accounts.
Unfortunately, Tesla’s big bet on China, with its Shanghai factory, is now fighting a headwind of two years of declining vehicle sales in China. Here in the U.S., electric vehicle sales have slowed as federal tax credits have been systematically cut and eliminated for manufacturers that have sold over 200,000 vehicles. Furthermore, Mercedes recently decided to postpone the launch of its electric SUV due to slow sales of electric vehicles in the U.S. As a result, unless Tesla continues to post better-than-expected international sales, the stock is now poised for a major sell off.
The Market Will Likely Ignore the Coming Impeachment Trial
In domestic politics, I noticed that during the NCAA National Championship College Football Game in the Super Dome as President Trump and the First Lady came on the field with the military before the National Anthem, the crowd was chanting “USA, USA,” which naturally bodes well for his re-election chances in November. Although most of these football fans were likely from “red states” in the South, because the teams were from Louisiana and South Carolina, it will be interesting to see if President Trump tries to make a “cameo” appearance on the field with the military again at the Super Bowl, which is expected to be a more diverse crowd, held in Miami and featuring a team from Nancy Pelosi’s home district, San Francisco. It seems to me that Wall Street prefers President Trump’s economic policies and optimistic message and is anticipating his re-election, so a major correction may await the election results.
I should add that on Wednesday, the House of Representatives voted to send the impeachment articles to the Senate for a trial. Since this trial will interfere with several Senators (Bennett, Klobuchar, Sanders, and Warren) campaigning in Iowa, it will be interesting to see if the Senate impeachment trial will artificially boost the polls of the non-Senate candidates (Biden, Bloomberg, Buttigieg, Steyer, and Wang).
I expect that the stock market will largely ignore the Senate trial, since an acquittal is widely anticipated.
The Economic News Begins 2020 with a Positive Ring
On Tuesday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.2% in December, just below the economists’ consensus estimate of a 0.3% increase. Gasoline prices rose 2.8% and caused overall energy prices to rise 1.4% in December, while food prices rose 0.2%. Excluding food and energy, the core CPI rose 0.1%, just below the economists’ consensus estimate of a 0.2% increase.
On Wednesday, the Labor Department reported that the December Producer Price Index (PPI) rose 0.1%, below economists’ consensus estimate of a 0.2% increase. Wholesale energy prices rose 1.5%, while food prices declined by 0.2%. Excluding food and energy, the core PPI rose 0.1%. In the past 12 months, the PPI and core PPI rose 1.3% and 1.5%, respectively, so wholesale inflation remains relatively tame.
Also on Wednesday, the Fed released its latest Beige Book survey, which noted that U.S. economic activity continued to expand “modestly” in the last six weeks of 2019. Two of the 12 Fed districts (Dallas and Richmond) reported economic growth that was above average, while three districts (Kansas City, St. Louis & Philadelphia) reported slower growth. The Fed noted that there were some manufacturing job cuts and flat vehicle sales in a handful of districts. Overall expectations “remained modestly favorable.”
On Thursday, the Commerce Department announced that retail sales rose 0.3% in December, in-line with economists’ consensus estimates. Vehicle sales declined 1.3% in December – the only category reporting a contraction. Excluding vehicle sales, retail sales rose a much more robust 0.7%. Overall, this retail sales report indicated a strong holiday shopping season and bodes well for fourth-quarter GDP growth.
Rounding out the weekly indicators, the Commerce Department announced on Friday that housing starts rose 17% in December to a 1.61 million annual pace, a 13-year high. Also interesting is that multi-family housing starts have risen 32% to a 33-year high, while single-family homes have risen 11% in the past month. Compared to 12 months ago, housing starts have risen an amazing 41%!
All four major regions of the U.S. saw housing starts rise in December, led by a 57% surge in single-family starts in the Midwest – which benefitted from mild winter weather. A strong housing market should help to boost U.S. GDP growth and partially offset the manufacturing slowdown.
All in all, this is a strong start to the New Year and indicates no sign of a recession in sight.